When the Bank Says No
Getting a mortgage approval is never a sure thing, even if you’re the richest individual in the world with the best credit rating.
There are a lot of underwriting and regulatory guidelines that must be met for both for the borrowers and the property. So sometimes even the most creditworthy borrower could still run into barriers along the way.
While the possibilities are endless, here are some common reasons your application may be denied.
Let’s start with credit, which is a biggie. First off, if your credit score isn’t above a certain level, your application might be declined. Banks and Mortgage Insurers look for beacon scores over 600 to determine if they can lend to you. What is reporting on your credit file is equally important, if you have recent mortgage arrears, you could be denied for a subsequent mortgage. The same goes for past foreclosures, bankruptcies, collections, late payments, or arrears. Another credit issue that is when borrowers open new credit cards or accumulate debts just before the mortgage approval process. Doing so can hurt your credit score and/or increase your total monthly liabilities, affecting your affordability.
Income and Affordability
Speaking of affordability, if you don’t make enough money for the mortgage you’re trying to qualify for, you could be denied. Depending on your down payment amount you may have to qualify at a benchmark rate much higher than your actual rate. Your income source is equally important. If you are new in your job, on probation, commission or bonus components with less than two years, you’ll have some explaining to do. Lenders will want to see that your income is steady and expected to be maintained in the future. Self-employed individuals may have significant write-offs or a cash component that needs to be considered, or perhaps there is a rental income or a roommate that helps pay monthly expenses, this income may not be considered by all lenders.
Another common issue is confirming the necessary funds to close your mortgage. Normally, you will require both down payment money and closing costs confirmed for a certain number of months in your bank. Verifying the source of funds is equally important as all lenders have to follow Anti-Money Laundering guidelines. So if you have been saving your tips under your mattress you may want to consider this beforehand.
As mentioned, it’s not just about you qualifying. If the property doesn’t appraise with the expected value, you may require more money at closing. Or if the lender doesn’t like the property condition, you might need to walk away. Whether the property is owner occupied or a rental could be a concern. For condo buyers, there are additional hurdles that involve strata and reserve funds of the condo corporations. Even if it’s a single-family home, if there’s something unique or interesting with the property – a home-based business or next to a gas station, cracks in a foundation, or structural issues, financing might not happen.