What you can do if your mortgage application is declined

There is nothing more disheartening that having your mortgage request declined because qualifying for a mortgage today is more complex than it once was.

That is why it is so important to include a condition for financing in any offer to purchase a new home. Don’t assume you will be approved now because you were in the past or you only want to move your current mortgage to a new property.

Even if your bank says no, you may still have options. Let’s explore some common reasons for mortgage declines and how you can improve your chances of approval.

Here are some of the most frequent reasons why lenders might reject a mortgage application:

You didn’t pass the mortgage “stress test”—Although the current mortgage stress test rate is 5.25%, you must qualify at the contract rate plus 2%. For example, if your contract rate is 4.69%, you’ll need to demonstrate you can afford payments at 6.69%. All federally regulated lenders (such as banks) and most credit unions follow this rule. There are some exceptions, so make sure you chat with your mortgage broker to see where you might fit with some of the new rules for qualifying.

Low credit score or poor credit history—Lenders typically look for a credit score of 680 or higher to offer the best mortgage rates. If your score falls below that threshold, it could limit your options or result in higher interest rates with an alternative lender.

Insufficient income—Your income needs to cover not only your mortgage payments but also property taxes, heating costs, strata fees and day-to-day expenses like groceries and transportation. If your declared income is too low, you may not qualify for the amount you’re seeking.

Employment instability—Lenders typically prefer salaried or hourly employees with consistent, guaranteed income, generally in the same line of work for a minimum of two years. Self-employed individuals—especially those with newly established businesses—often face more scrutiny.

Property issues - Lenders aren’t just approving you, they’re also evaluating the property. Structural damage, mold or other significant issues can raise red flags, as those problems often lead to costly repairs. Properties with major defects may not meet lender requirements.

Low appraised value—If the property’s appraised value comes in lower than expected, it could affect your mortgage approval. For a purchase, this may mean needing a larger down payment. In the case of a refinance, the amount you can borrow is capped at 80% of the appraised value, which could limit your access to equity.

A mortgage broker can help you strengthen your mortgage application and explore alternative lending solutions. Here’s how:

Credit improvement: If your credit score is holding you back, the broker can develop a plan to repair it, by consolidating or paying off certain debts or ensuring timely payments.

Debt management: A broker can assess your financial situation and create a strategy to reduce debt, making your application more appealing to lenders.

Property evaluation: A broker can help you understand how different property types affect financing and guide you in setting a realistic budget.

Down payment planning: If your downpayment is too low, a broker can outline a savings plan.

Alternative lender options: If you’re self-employed or don’t meet the strict criteria of traditional banks, a broker has access to alternative or private lenders who offer more flexible short-term solutions. With a plan, that can be an excellent alternative.

To house hunt with confidence, consider getting pre-approved before you start viewing properties. A pre-approval ensures you know your borrowing power and reduces the risk of falling in love with a home you can’t finance.

If your mortgage application has been declined, don’t lose hope.

You can email me at [email protected] to discuss your situation. Or book a consultation at: calendly.com/april-dunn

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.