An important first step in the home-buying process is being pre-approved for a mortgage. This affords you the luxury of knowing your purchasing power and the calm that you have inched closer to completing the mortgage application. You can be pre-approved in as little as an hour. As long as you have all of the documentation necessary for this endeavour and you have shopped around for the best rates, it is not a tiring ordeal. That said, if you are in the market for a new home and have already been pre-approved for a mortgage, you might think you’re in the clear. However, this is not always the case. There are several reasons a mortgage can be denied after pre-approval, and you must understand what causes it to happen to ensure your mortgage will be approved.
Reasons a Mortgage Can Be Denied After Pre-Approval
There are a number of reasons that a mortgage can be denied even after the prospective applicant has received pre-approval. Here are a few of the more common reasons:
Change of employment – One of the requirements for approval for most mortgages is steady employment. If you have changed jobs and are still in the probationary period with your new employer, this can negatively impact your mortgage approval. However, exceptions may be made in some cases, like if the job change is within the same field. The length of time you are required to be with an employer varies, but typically, it is at least six months.
A poor credit score – You do not need perfect credit to be approved for a mortgage, but there is a minimum requirement for your credit score (and for most lenders, it is a minimum score of 650). If you have been pre-approved but then take on new debt or miss existing debt payments, this will hit your credit score and can potentially knock it down enough that you may not be approved.
Additional debts – Related to your credit score, taking on large debts when trying to get a mortgage is not a good idea. Hold off on buying that new car or applying for a line of credit until your mortgage deal officially closes and you have the keys in hand.
Changes in loan requirements – It is possible that after pre-approval, a lender or mortgage product may experience changes to their requirements and guidelines that result in you being denied the mortgage. These may include changes in debt-to-income policies, the savings required of the buyer, or a mortgage insurance premium increase.
Appraisal issues – In some cases, the mortgage pre-approval for an applicant is subject to a satisfactory bank appraisal. If there are issues with the appraisal, the mortgage application could be denied.
Property issues – Is there a stigma attached to the property (a crime scene or a marijuana dispensary)? Is there an energy development nearby? Is the home prone to climate change disasters? If so, you could face denial after being pre-approved for a mortgage.
History of late payments – You have a record of late payments. It might show up on your credit report, but if it does not, officials in charge of approving or rejecting could discover that you have routinely been late to pay your credit cards, utility bills or rent.
Failed the Mortgage Stress Test – A mortgage stress test has become a mandatory step in the application process. It is meant to determine if borrowers can handle higher interest rates. So, in order to pass a mortgage stress test, you need to be able to show that you can endure the contract rate plus two per cent.
Sudden change in income – If there has been a sudden change in income levels, whether a job loss or a significant financial emergency, you could experience a rejection by the bank lender or CMHC (see below).
What to Do If Your Mortgage Has Been Denied
Luckily you don’t have to give up if your mortgage application has been denied. There are several things you can do to improve your financial situation and increase your chances of being approved:
Improve your credit score – Raising your credit score is the most reliable way to convince lenders to give you a mortgage since it shows you can make payments on time.
Pay down debt – If your debt-to-income ratio is too high, pay down some of your debt to lower the ratio. A consolidation loan could help speed up the process if some of the debt comes from credit cards or other high-interest sources.
Increase income – Like paying down debt, increasing your income will help improve your debt-to-income ratio.
Increase the down payment – By saving more money for a down payment, you will decrease the mortgage amount and the risk to the lender. As a result, they will be more likely to approve you for a mortgage.
Get a co-signer – If you have unreliable credit, you could try getting someone to co-sign your mortgage application. This person must have a good credit history and agree to pay your mortgage if you can’t. However, many people refuse to co-sign because it poses a risk to them.
How to Ensure Your Mortgage is Approved
It is never a good feeling to be left wondering whether your mortgage application will be approved. There are a few things you can do to help ensure that you are not denied, including:
- Don’t take on any additional debt like a new vehicle, student loan or line of credit. This includes financing furniture and appliances for your new home. Wait until you have the keys in hand.
- Don’t make any large deposits into your bank accounts without having proof of their source, and don’t make any large withdrawals.
- Continue to save money and make loan payments on time.
It can be devastating to learn that, despite being pre-approved for a mortgage, you can’t get financing to purchase the home you want. There are several reasons this can happen, so be sure to consult with your mortgage lender if this occurs so that you can take the necessary steps to remedy your situation and get your mortgage approved as soon as possible.
CMHC Can Also Walk Away
Canada Mortgage and Housing Corpo. (CMHC), a federal crown corporation in charge of administering the National Housing Act, plays a crucial role in the Canadian real estate market and the mortgage market. This is because lenders will require mortgage loan insurance if homebuyers purchase a home with a down payment of less than 20 per cent of the purchase price, also known as a high-ratio mortgage.
CMHC covers the mortgage lending institution and the risk the bank takes on by extending borrowers a mortgage.
Now, the CMHC does not assess whether or not homebuyers are pre-approved by the financial institution. Instead, the federal agency can deny your application for various reasons, such as unstable employment, low income levels, a questionable credit report, if the home is too expensive, or poor housing conditions. Indeed, even if you have the full 20-per-cent down payment, you could still be rejected by the CMHC.
Industry experts contend that this is why it would be prudent to insert a financing condition on an offer, when the down payment is less than 20 per cent. A financing condition is a part of the home-buying process that allows you a period of time to confirm that you can obtain a mortgage approval. It ensures you can walk away from the offer without incurring monetary penalties, such as losing your deposit or facing litigation. While it is true that sellers generally prefer unconditional offers, it is a shield to protect yourself against financial disaster.
Another tidbit of information you should have in your back pocket is that if you were to refinance your mortgage, you could lose the default insurance certificate.
