Top 5 Reasons Your Mortgage Loan Got Declined

Mortgage loans can become cause for confusion, anxiety, and stress. With lots of questions, terms, and factors coming into play, people often wonder how to tackle the issue of getting declined by the bank. As part of this series, we would like to shed light on how to avoid the chances of getting declined for a mortgage, and the proactive efforts you can make to avoid this from occurring.
 
Just to quickly recap, we pinpointed 5 typical reasons a mortgage application is likely to be declined. These 5 areas seem to be the most common challenges facing many applicants:
 
1) Your Credit Rating & Report
2) Your Earnings and the Type of Income You Have
3) Ability to Meet the Industry Required Debt to Income Ratios & Stress Text Criteria
4) The Type of Property
5) Setting Expectations Incorrectly
 
There may be other situations, however, the five noted above seem to encompass the majority of issues faced by potential borrowers. Let’s take a deeper look:

1) Your Credit Rating & Credit Report
 
The very best advice I can give is simply “pay your bills”.  It is so important to ensure that you make all credit payments on time.  The reason is that sometimes we mis-calculate our timing and can easily overlook the payment due date. This missed payment will be noted in your credit report and will be a black mark on your record for up to 7 years. This will lower your credit score and present a strike against your credit worthiness – not something you want!  Keep an eye on your payment due dates and try to pay well before the due date to ensure no issues arise. Additionally, you should try and pay your credit balances in full, when and if possible. This will also help improve your credit by improving your utilization ratio. If you make only the minimum payment and keep a credit balance outstanding, this can actually hurt your credit score in the long run. Keep your credit balances at or close to zero if you can - it is best to have a little debt as possible showing on your credit report. This shows the creditor that you are responsible and able to manage your obligations, and not an ultimate risk to them. If you cannot afford it, then don’t buy it. Ensure you have the cash to cover the credit purchase you make. Avoid trying to apply for many forms of credit and be careful as to the type of credit you are applying for. The number of times you apply for credit is recorded in your report and may reflect negatively on you, as you may be viewed as a desperate credit seeker. Stay away from certain creditors such as Payday Loans, because lenders may think that you cannot maintain finances and the responsibility of a loan. A damaged credit report is not easy to repair and takes a long time to do so, so ensure you protect and keep it up to date.

2) Your Earnings & Type of Income 
 
Lenders look very closely at income and the type of employment.  If you are salaried, the income confirmation is relatively straight forward.  But if you are a contract worker, paid by the hour with plenty of overtime or self-employed, the loan approval income confirmation will vary.  Lenders look for consistent income and length of time at the job or in your particular career.  Income is usually consistent with those on a salary, but this may not be the case for contract workers and those who are self-employed.  If you are salaried, the basic income confirmation information required would be:
 

• copy of a current paystub
• job letter
• most recent T4 Slip
• copy of the most recent Notice of Income Tax Assessment

Lenders will use more scrutiny for those on contract or are self-employed.  The reason is that self-employed income is not consistent nor guaranteed unlike a salary.  They will require a track record from the applicant, usually a 2-3 year period, which will show a steady income pattern for the lender to rely on for the approval.  The lender wants to ensure that commission or self-employed earnings are consistent year after year.  The typical documents a commissioned or self-employed individual will have to supply to the lender are:
 

• last 2-3 years of Notice of Income Tax Assessments (personal & corporate)
  
• last 2-3 years Formal Income Tax Returns (personal & corporate)
  
• personal & corporate financial statements
  
• any other personal or corporate tax declarations or financials as deemed necessary by the lender

 
This is quite a compelling list, with no guarantee of approval from the lender.  Ensure you are prepared for whatever income requirements fit your situation.  Best advice is to speak with a mortgage professional and know your options and the requirements beforehand.  This will save you time and potential let down.
 

3) Ability to Meet the Industry Required Debt to Income Ratios & Stress Text Criteria
 
Servicing debt ratios are used by many institutional mortgage lenders, and they are a key indicator as to affordability of the loan for the customer.  They will assess your income as highlighted above, and then offset it against proportional expenses to determine how much you can afford to borrow.  The 2 main ratios used by institutional lenders are the Gross Debt Service Ratio (GDSR) & Total Debt Service Ratio (TDSR).  In a nutshell, the two ratios represent the following:
 
(GDSR) – The Gross Debt Service Ratio ensures that no more than 32% of your gross monthly household income is used to cover the following monthly expenses:
 

• monthly mortgage payment
• monthly property tax amount
• 50% of the monthly strata fees (if applicable)
• monthly heating expense

 
(TDSR) – The Total Debt Service Ratio ensures that no more than 40% of a gross household income can be used to cover the items noted with the GDSR, in addition to the following monthly credit obligations:
 

• any outstanding credit card monthly payments
• any outstanding personal loan monthly payments
• any outstanding credit line monthly payments
• any outstanding car loan payments
• any other debt outstanding payments

 
These two ratios will set the ceiling as to the maximum amount you can borrow, based on your income and overall monthly expenses.  However, there are various lenders in the market, those who are more flexible, and their mortgage approval ratio percentages are higher.  This may result in you qualifying for a higher mortgage loan amount, but the costs and interest rate may differ compared to those of a bank.
 
The loan ratio calculations may seem confusing, and that is why you should contact a mortgage professional, so the process is explained and easier to understand.
 
Above and beyond the ratios noted above, the Government of Canada has also implemented a financial stress test for mortgage loan approvals.  “The so-called stress test is a financial bar that any Canadian looking to take out a mortgage must pass to be approved for one…. The idea is to save the borrowers from biting off more debt than they can chew and ensure they have financial wiggle room if rates rise.”  A mortgage professional will help you maneuver through the ratio calculations and stress test requirement and streamline the mortgage approval process for you.

4) Type of Property
 
The type of property being mortgaged will also impact the loan approval.  Owner-occupied properties typically get the best mortgage rates and options associated with them.  Lenders favour owner-occupied properties, because they tend to be less of a riskier situation for the lender.  Homeowners typically have pride in home ownership, and so in most cases will maintain their financial responsibilities regarding their home. 
 
On the other hand, rental properties usually warrant higher interest rates in some situations and may have additional costs associated with the loan set-up.  Being a revenue property, the loan amount you qualify for will also be impacted by the rental income and all fixed costs associated with the rental property.  Far more scrutiny is applied by lenders towards rental properties, because the calculated risk is higher for them.
 
Vacation or recreational properties also fall under a different category regarding the mortgage approval process.  They are also subject to typically higher interest rates & costs in some cases, since they are not a primary residence and tend to be in rural areas. 
 
It is best to speak with a mortgage professional to know your options when considering the purchase of any type property.  

5) Setting Expectations Incorrectly
 
Most of us want to embrace the unreal feeling of the “Pride of Homeownership”, yet we tend to forget the fact that the responsibilities can be tremendous.  Owning a home and paying a mortgage is not the same as simply paying rent.  It is far from it.  The additional responsibilities of owning a property are many.  In addition to your monthly mortgage payment, you can anticipate the following expenses:
 

• property taxes
• monthly strata fees
• heating expense
• water & hydro
• garbage collection / municipal costs
• property maintenance & repairs
• gardening expenses
• interest & opportunity cost
• potential special assessment expense (strata properties) – this could result in tens of thousands of dollars
• unexpected costs

 
It is best to have a game plan in place, prior to jumping right in and rushing to buy, refinance or take out equity of a property.  Ensure you know what lies ahead and what options fit your situation.  Contact a mortgage profession, who will coach and guide your through this process effectively. This will greatly improve your chances of getting your mortgage approved and avoid being let down and discouraged. 
 
If you need any help, advise or guidance regarding the mortgage approval process on all levels, Contact Us or give us a call.  We are here for you to answer any questions, and assist in any way.