You have a good credit score, the full down payment, steady job with a high enough salary but still the bank rejected your mortgage application. What are the common reasons for rejection these days?
You have an excellent credit score but you were still rejected due to your credit
Credit score of over 700 will allow you access to the best mortgage offer, but still I have clients with a score over 800, who were rejected. What was the reason for the rejection? Their credit was new and not established, or vice versa, there credit score was established but they hardly used their credit cards. In order to get an approval for your mortgage you need an active credit rating. Active credit score is defined by the banks if you have at least 2 activities for a minimum limit of 2500$ each. For example car loan and Visa credit card with a limit of $3000. Even if your credit score is high, if the activity is thin it will be hard to get you a mortgage.
It’s not you – it’s the property
When a mortgage is approved there are 2 subjects checked: you as a borrower and the property you are planning to buy. Even if you are a great candidate you might be rejected due to the state of the property. This is especially relevant if you are buying a condo but also could happen when you are buying a house. When buying a condo it is crucial to read the strata minutes in order to check for water damage, budget deficiencies or lawsuit filed by or against the strata.
If there were any repairs done it is important to verify the repairs have been completed and get the engineer’s report that approves the completion and the specification. Without the relevant documentation including the depreciation report or without Form B showing the Strata reserve funds, the chances of getting a mortgage for the property is low.
Realtors and mortgage brokers can initially help you check if the condo has any problematic record. Your realtor can help you overview the strata minutes and check for signs of difficulties. When buying a house it is important to check for an oil tank that was not cleared or if the house was a grow-op house (has been used to grow weed inside). Also in case of buying a house it is important to use the realtor to go over the PDS in order to assess the condition of the house.
You have the full down payment but according to the bank it is not sufficient
In order to have the money accepted as the down payment you have to show bank statements supporting the funds in your possession for a minimum of 90 days. There are mortgage plans that accept the down payment as a gift from an immediate family member.. The only family members’ gifts approved are parents, siblings and children. Some lenders require a gift from spouse to be supported by 90 days statements. Gifts from grandparents or uncles will not be used. You will be asked to present a letter from your parents and a bank statement showing the money has been deposited in your account. You always be asked to present the full trail of the money.
The way we view the down payment is different from the bank’s view: even if you have 90K in the RRSP, you’ll be allowed to use only 25K for the down payment (for each borrower). The bank will request a printout of activities in the last 90 days of your account. They will deduct all the deposits in those 90 days and you will be asked to explain the source of deposits over $1000. Salary received in those 2 months will not be included since they are not in the account for over 90 days. In this case even if you have the full down payment amount – the bank does to see eye in eye with you.
Appraisal did not come out as expected
The bank calculates the mortgage according to the lowest value between the appraisal and contract for the house. A lower appraisal could be caused by a current database that is a lag behind an inclining market that moves up. In many cases in order to have a winning offer you offer higher than asking price. In the same time the appraiser’s database does not show sales of the same magnitude. The appraisal is based on last sales (and not asking prices) in the area for similar properties. If you your appraisal comes in with a lower value than requested, the bank will approve a lower mortgage, that will require from you a higher down payment. This brings us back to supporting a higher down payment from your own resources.
Your income this year is on the rise and still the bank does not approve it
Also in this case banks and Institutional lenders have their own view of your income. If you are self employed, you must show 2 years of Revenue Canada tax documents and to have your mortgage approved. Even if your income has doubled in the past few months, the bank will calculate the average of income in the last two taxable years, and that is only if your income has shown growth for the last year. If not, they will take the lower of both and not the average. If you are e full time permanent employee, the calculation is easier. The bank will rely on a letter from the employer and last 2 payment slips to confirm the numbers. They will also call your employer to verify the details. If you have additional income, like bonuses, overtime or an additional part time job, you’ll need the show two years tax documents to support the additional income source. As you can see, not all incomes count the same when it comes to the banks.
Preparation is the key! An experienced mortgage broker can predict the challenges and help you manage the process in order to succeed. We recommend starting preparing your finance even before you go check out the first house on the list.