Mortgage Denied in Canada? Why It Happens and What to Do Next

A declined mortgage application is rarely the end of the road. Lenders decline against specific thresholds, so the reason for the decline tells you what has to change, how long that is likely to take, and whether a different lender would see the same application differently. This guide is part of our mortgage lenders and brokers guides.

Why mortgage applications get declined

Every lender checks the same handful of things. Falling short on any one of them can end the application.

The two ratio limits and the stress test are rules, not lender preferences:

• For an insured mortgage, CMHC caps your housing costs at 39% of gross income (GDS) and your housing costs plus other debt payments at 44% (TDS); lenders set their own limits for uninsured mortgages. How each ratio is built is explained in GDS and TDS ratios.
• Lenders check that you could afford the payments at the greater of your contract rate plus 2% or 5.25%, a floor set by OSFI for uninsured mortgages and by the federal government's mortgage insurance rules (the Minister of Finance's Eligible Mortgage Loan Regulations) for insured ones. See the mortgage stress test for worked examples.
• For a CMHC-insured purchase, at least one borrower or guarantor needs a credit score of 600 or more; CMHC may use other ways to judge creditworthiness for a borrower with no credit history. What lenders want above that floor is covered in the credit score needed for a mortgage.

Step 1: Find out exactly why

Most lenders will tell you the reason if you ask, and the precise threshold you missed shows how much needs to change. Call the mortgage specialist or broker who handled the file and ask:

• Which ratio failed, GDS or TDS, and by how much?
• Was it the credit score? What is this lender’s minimum?
• Did the appraisal raise a concern about the property?
• Could the lender verify your income and your down payment?

Then pull your credit reports from both Equifax and TransUnion (the FCAC explains how to order them) and look for:

• Errors: accounts that aren’t yours, wrong balances, or paid debts still shown as delinquent. Errors can be disputed with each bureau, and a dispute can take weeks.
• Collections: old accounts sent to collections that you may have forgotten.
• High balances: card balances that use a large share of their limits pull scores down (see credit utilization).
• Missed payments: even one recent late payment can lower a score noticeably.

Step 2: Match the fix to the reason

How each lever works is covered on its own page: qualifying for a larger mortgage, improving your credit score before you apply, what lenders look for in your bank statements, how credit card debt changes your maximum mortgage and changing jobs during the mortgage process. Down payment savings through an FHSA or the RRSP Home Buyers’ Plan are explained in how to save for a down payment.

If you’re self-employed

Lenders qualify self-employed borrowers on the income reported on their tax returns, not on business revenue, so heavy write-offs are a frequent reason for a decline. The options (declaring more income for two years, a lender that uses business-for-self programs, a larger down payment) are compared in getting a mortgage when self-employed, and stated-income mortgages explains how those programs verify income.

If it was a consumer proposal or bankruptcy

A recent insolvency usually means a B-lender or private lender first, then a move back to a bank once the record ages. The waiting periods are covered in a mortgage after a consumer proposal and a mortgage after bankruptcy.

Step 3: Choose where to apply next

The bank that declined you applied its own criteria. Another lender’s may fit your profile better, which is why the channel matters as much as the fix.

• A mortgage broker sends one application to the lender most likely to approve it, instead of you applying at several banks and collecting several hard inquiries. Brokers are usually paid by the lender on standard (A-lender) mortgages; how mortgage brokers get paid explains when a borrower pays a fee, and the best mortgage brokers in Canada compares them. The trade-offs between a broker, a bank and an online lender are in mortgage broker vs bank vs online lender.
• Credit unions and monoline lenders set their own guidelines, and some are more flexible on income or property type than a big bank. See the best mortgage lenders in Canada and big bank vs monoline lenders.
• B-lenders (trust companies such as Equitable Bank and Home Trust) approve near-prime borrowers and non-standard income at higher rates and usually with a lender fee. What a B-lender is and how the exit back to a bank works is explained in B-lender mortgages; the named lenders are compared in the best B-lenders, and lenders by credit band in mortgage lenders for bad credit.
• Private lenders lend mainly against equity, for short terms and at much higher cost, so they work only with a clear plan to refinance or sell. See private mortgage lenders in Canada.
• A co-signer or co-borrower adds income or credit strength, and becomes fully liable for the debt: see co-signing a mortgage.
• Rent-to-own is an option when approval is one to three years away, with less choice of homes and a higher total cost: see rent-to-own homes in Canada.

Rates for each lender type move with the market; current figures are on today’s mortgage rates.

Common mistakes after a decline

• Applying at several more banks right away. Each application can add a hard inquiry, and if the problem is your ratios or your credit, the answer will be the same.
• Taking on new debt to bridge the gap. A personal loan for the down payment raises your TDS and usually makes approval harder.
• Misrepresenting anything on the next application. Mortgage fraud is a crime under the Criminal Code (up to 14 years in prison where the value exceeds $5,000). Lenders verify income, employment and the source of the down payment, and a material misrepresentation can lead to the mortgage being cancelled or called, and to criminal charges.
• Treating it as permanent. Most reasons for a decline can be fixed within months.

How long before you can apply again

Before reapplying, a broker or lender can do a preliminary review of the file, so the next formal application (and its credit check) goes only to a lender whose criteria you meet. The rest of the approval process, from pre-approval to the underwriting review, is covered in how the home buying process works.