Planning to buy a home and apply for a mortgage? A vital first step is to get a pre-approval from a lender – a preliminary theoretical approval based on your finances, credit, and employment situation. Getting pre-approved can help establish a firm home buying budget, and provide peace of mind that you can qualify according to a lender’s underwriting guidelines.
However, being pre-approved isn’t a guarantee that you’ll be granted a mortgage; there are a number of factors that can cause your bank to change its mind on financing your home purchase. Those paying less than 20% down should especially take care during this stage, as they’ll have to pass scrutiny from Canada’s mortgage insurers (CMHC, Genworth, and Canada Guaranty) in addition to their bank – and insurers have some of the toughest criteria of all.
Related Read: Is 5% Down Still Enough in Toronto’s Hot Housing Market?
The best way to avoid mortgage disappointment is to be proactive and take steps to ensure certain issues don’t arise during your application process. Here are the most common reasons a mortgage deal may fall through.
1: You Have Unstable Employment
If possible, never time starting a new gig with buying a home. If you’ve recently started a position with a new employer and are still within an employee probation period, that’s a red flag for your lender – the chance you may not be employed by the end of your probation poses risk to your ability to make your monthly mortgage payments.
Those who work on a contract basis, earn commission, or are self-employed also face greater scrutiny. You’ll need to provide proof of steady income for at least the last two years. If you can’t, it’s likely the lender will require you to co-sign with someone with strong credit in order to grant you your mortgage.
2: You Don’t Have Clear Down Payment Sources
To a mortgage lender, it isn’t enough that you have the cash to cover your down payment and closing costs (land transfer tax, lawyer fees, etc.) – you have to prove where your funds came from, and that they’re not from questionable source. That means producing at least 90 day’s-worth of proof of deposits prior to your closing data. You must always indicate whether you’ve received any gifted money, and whether it came from anyone outside your immediate family. If that’s the case, or if you’ve pulled cash from an unsecured line of credit or credit card, you can count on your mortgage application to be declined at once. It’s especially important to ensure these financial details are confirmed before entering a live Offer to Purchase deal – it’ll save a lot of unwanted emotion and wasted time for everyone involved.
3: You Have a Shady Credit Past
If you’ve encountered any past or current credit issues, or are involved in a consumer proposal or bankruptcy of any kind, that can jeopardize your mortgage application. Making late payments, paying child support, having unpaid student loans and even high monthly car payments can pose issues for your mortgage broker. Resolving these issues may be a simple fix, such as paying off a debt, or resolving an outstanding item on your credit report. In some cases, paying a larger down payment may be necessary to offset a credit issue.
4: The Property is Less Than Perfect
Sometimes, the problem lies with the home you’re trying to purchase – if there is something less desirable about the property, or it’s overvalued, your lender may refuse to finance your purchase. For example, if you’re looking to buy a condo unit, and the condo corporation’s status certificate indicates past or forecasted financial trouble, your lender may take issue. The same goes for properties that sell far above their reasonable valuations (a common occurrence in today’s Toronto real estate market) – just because you were willing to blow your budget in a bidding war doesn’t mean your bank will be.
Other factors include buying properties with more than four separate units, non-owner occupied purchases with less than a 20% down payment, homes priced over $1 million, and stigmatized homes, such as former marijuana grow-op houses. These property types are not covered by high-ratio mortgage insurers, and you’ll need more than a 20% down payment to qualify for a mortgage for them. Even in that case, there still may be instances where lenders may not feel comfortable, and will turn down your application.
Keep in Mind When Applying For Your Mortgage
Every mortgage borrower, and property, is different. Rules, rates and regulations may differ between lenders, and making a 20% – or even 50% – down payment doesn’t guarantee you’ll be approved. Be sure to talk to your mortgage broker during the process, who can determine the best mortgage product for your specific needs, and help you with the qualifying process.