You’ve found the perfect home for you and your family: a small bungalow in a quiet neighbourhood, not too far from work and only a 10-minute walk from a school for your kids. You go to your bank and meet with a mortgage specialist, ready to start your journey to becoming a homeowner.
After discussing your needs and providing all the required documents, you wait with bated breath. And then comes the bad news: your mortgage application has been rejected.
Watching your dream of buying a new home crumble before you is painful, and knowing that this happens regularly to other mortgage hopefuls across Canada doesn’t make it any easier. You want to know why you were denied.
Main reasons why mortgage applications might be rejected:
Low credit score
Your credit score – often referred to as a Beacon score in Canada – is considered the number one factor influencing whether or not your mortgage application is approved (and if approved, your credit score also greatly influences the mortgage rate provided). When you apply for a mortgage, your bank or other lending institution will contact a credit bureau to find out your credit score.
If your score is below the institution’s minimum, this may be all it takes for them to decide to deny your application. While the minimum score varies depending on the lender, among Canada’s big banks it is often set at around 650 (on a scale of 300–900) for clients seeking prime rates.
High total debt service ratio
Your total debt service (TDS) ratio is a financial measure often used by lenders to assess your ability to pay off a mortgage. It is calculated by adding up your family’s monthly mortgage payments, property taxes and other debt payments, and dividing this sum by your family’s gross monthly income. The higher your TDS, the greater the risk that you will struggle to make your mortgage payments.
Similar to a minimum credit score, your bank or other lender will typically have a maximum TDS level, such as 38% or 40%. If your TDS is above this maximum, your mortgage application will likely be rejected, even if your credit score is reasonably good.
Another important factor that some lenders take into account when reviewing a mortgage application is the specific property you want to buy. In particular, the lender may consider a recent appraisal of the property, as well as factors like its location, what shape it’s in and how long properties in the area typically sit on the market before being sold.
Ultimately, the lender is trying to assess whether it would be able to recoup the principal, interest owed and all expenses if it has to take the property back in the event of borrower default. If the lender isn’t satisfied with what it sees, your application will be rejected.
Risky employment situation
Your job – and that of your partner or spouse – is taken into consideration when assessing your mortgage application. What exactly a bank or other lender is looking for may vary, but in general it is trying to gauge the stability of your employment and income. If the lender is not satisfied, it will deny your application.
For example, if you’ve been working only a short while or you’ve switched jobs frequently, it may consider you a greater risk than someone who has been in the same job for years. Being self-employed is also viewed as a higher risk factor, and you will likely need to provide more documentation to prove you can handle a mortgage.
Inadequate cash flow
Your cash flow – in other words, the flow of income you receive versus payments you make each month – is also a key factor considered by prospective lenders. This is linked to factors like your employment income and TDS, but it digs deeper to ensure all debt obligations have been consistently met in a timely manner.
For example, you may have a seasonal job from which you earn quite a high annual income, but if you’re active in this job and receiving payments during only six months of the year, it means you might face cash flow issues during the six months when you’re not working. Perceived issues with your cash flow are another possible reason why your mortgage application might be rejected.
Moving beyond rejection
When you’ve been dreaming of your life in a new home, having your mortgage application rejected can be devastating. However, it’s important to remember that one rejection isn’t the end of the road.
To move forward with your home ownership dream, start by identifying the possible reasons for your application being denied. This will help you understand what you need to work on for the next application.
It can also be helpful to look beyond the big banks. Private lenders and mortgage investment corporations – like Pillar Financial Services – have the flexibility to structure mortgage deals in ways that the big banks are unable to, which allows us to provide solutions for clients who don’t fit the mold.
We welcome you to submit your inquiry directly to our underwriters online: