Getting pre-approved for a mortgage is an essential first step in the
home-buying process. It gives you the confidence of knowing your purchasing
power and helps move you closer to completing your mortgage application. While
pre-approval can happen quickly—sometimes in as little as an hour—it's
important to understand that pre-approval doesn't guarantee mortgage approval.
There are several reasons why a mortgage may be denied even after you've
received pre-approval. Here, we'll discuss the key reasons and how to avoid
denial after pre-approval.
Reasons a Mortgage Can Be Denied After Pre-Approval
Even after receiving pre-approval for a mortgage, there are several
reasons why your application could be denied. Here are some common causes:
1. Change of Employment
Mortgage approval often requires steady employment. If you switch jobs
and are still in a probationary period with your new employer, it could
negatively impact your mortgage approval. While some exceptions may apply—such
as a job change within the same field—most lenders prefer to see at least six
months of stable employment.
2. Poor Credit Score
While you don't need perfect credit to secure a mortgage, most lenders
require a minimum credit score of 650. If you take on new debt or miss payments
after pre-approval, your credit score may drop below the lender's threshold,
leading to a denial.
3. Additional Debts
Taking on additional debt while trying to secure a mortgage is a common
mistake. Postpone large purchases, such as a new car or a line of credit, until
after your mortgage closes. Adding significant debts will increase your
debt-to-income ratio, which can lead to a denial.
4. Changes in Loan Requirements
Changes in lender requirements and guidelines can result in your
mortgage being denied after pre-approval. These changes may include adjustments
in debt-to-income policies, savings requirements, or increases in mortgage
insurance premiums.
5. Appraisal Issues
Sometimes, mortgage pre-approval is contingent on a satisfactory
property appraisal. If the appraisal comes in lower than expected, or if there
are other issues, the mortgage application could be denied.
6. Property Issues
Certain properties may come with a stigma—such as being a former crime
scene or having a nearby marijuana dispensary—that could lead to a denial.
Additionally, if the property is prone to climate risks, or there is energy
development nearby, you may face complications.
7. History of Late Payments
If you have a history of late payments, even if it doesn't appear on
your credit report, lenders may discover this and decide not to approve your
mortgage. Late payments on credit cards, utility bills, or rent can hurt your
chances of approval.
8. Failing the Mortgage Stress Test
In Canada, a mandatory mortgage stress test assesses whether borrowers
can manage higher interest rates. Failing this test, which requires you to show
that you can handle the contract rate plus 2%, could result in a denial.
9. Sudden Change in Income
A sudden drop in income, whether due to job loss or an unexpected
financial emergency, can result in a rejection by both the lender and the
Canada Mortgage and Housing Corporation (CMHC).
What to Do If Your Mortgage Is Denied
If your mortgage application has been denied after pre-approval, there
are several steps you can take to improve your chances of approval:
1.
Improve Your Credit Score: Raising your credit
score can increase your chances of mortgage approval. Pay your bills on time
and reduce your credit utilization.
2.
Pay Down Debt: Lowering your
debt-to-income ratio will make you a more attractive candidate to lenders. You
might also consider a debt consolidation loan to pay off high-interest debt
more efficiently.
3.
Increase Your Income: If possible, increase
your income to improve your debt-to-income ratio. This can make a significant
difference in your mortgage application.
4.
Increase Your Down Payment: By saving more for
your down payment, you reduce the mortgage amount needed and the associated
risk to the lender, increasing your likelihood of approval.
5.
Get a Co-Signer: If your credit
history is unreliable, a co-signer with a good credit history may improve your
chances of getting approved. Keep in mind that co-signing carries risks for the
co-signer.
How to Ensure Your Mortgage Is Approved
To ensure your mortgage is approved after pre-approval, consider the
following:
·
Avoid Taking On Additional Debt: Hold off on financing
large purchases or opening new lines of credit until after you close on your
mortgage and have the keys to your home.
·
Avoid Large Financial Transactions: Don’t make
significant deposits or withdrawals from your bank accounts without having
proof of their sources.
·
Save Money and Make Timely Payments: Continue to save and
pay your existing loans on time to show financial stability.
CMHC Can Also Deny Your Application
The Canada Mortgage and Housing Corporation (CMHC) is a federal crown
corporation that plays a crucial role in the mortgage market. If your down
payment is less than 20% of the purchase price, you’ll need mortgage loan
insurance. However, CMHC can also deny your mortgage application for reasons
such as unstable employment, low income, poor credit, or subpar property
conditions.
Even if you’re pre-approved, CMHC can reject your application, which is
why it’s prudent to include a financing condition in your offer when making a
purchase. A financing condition gives you time to confirm mortgage approval,
allowing you to walk away from the offer without losing your deposit or facing
other penalties if the mortgage falls through.
Conclusion
Receiving pre-approval for a mortgage is an exciting step toward buying
a home, but it doesn’t guarantee final approval. To avoid being denied,
maintain steady employment, protect your credit score, avoid taking on new
debts, and ensure the property meets appraisal and other criteria. If your
mortgage is denied, take steps to improve your financial situation and work
with your lender to understand how you can qualify in the future. Remember, a
financing condition can protect you during this uncertain time, and it’s always
wise to proceed cautiously until your mortgage is finalized.
