What to do if the bank refused to issue you a mortgage
Mortgage alphabet
Despite the continuing decline in Canadian real estate prices, it is becoming increasingly difficult for borrowers to qualify for mortgages through their own banks or through other financial institutions that use standard qualification rules. This is mainly due to the sharp increase in interest rates and monthly payments, as well as the tightening of policies and requirements at major banks regulated by government authorities.
Clients who, only yesterday, would have been considered perfect bank borrowers are now receiving declines from their own banks. This applies not only to self-employed individuals, but also to salaried employees. Whether the issue is insufficient income, a credit score that is not high enough, or excessively strict requirements for income properties, the bank may have no choice but to decline the mortgage application. So what should you do if you cannot obtain a mortgage from a major bank? Do you immediately have to turn to private lenders, or give up altogether on the idea of buying real estate or accessing some of the equity in your home through refinancing?
Having worked in Ontario’s mortgage market for more than 20 years, we have access to so-called alternative banks, which occupy the space between major banks and private financing. These lenders have more flexible mortgage approval rules, the ability to consider additional income, and programs for clients whose credit history is less than perfect. Interest rates with alternative banks are usually higher, but the contract terms are shorter — often one or two years. With proper planning and an improved financial position, this allows clients to move into better lending conditions at the end of the mortgage term.
While many potential homeowners choose alternative financial institutions because their income does not qualify under the government-imposed stress test, or because their credit score is not high enough, some borrowers face additional documentation challenges or urgent circumstances. In these cases, we can offer access to a wide range of private lenders specializing in different segments of the market.
According to the Bank of Canada, private lenders doubled their share of the mortgage market after 2015, and by 2018 they accounted for 8% of Canadian mortgages. In Ontario, the share of private mortgages reached almost 12% in 2021!
Lenders of this type are less concerned with your income. They focus primarily on the value of the property and on the plan for future refinancing when the contract term expires, usually after one year. In exchange for much simpler qualification rules, private lenders charge higher interest rates and may require additional fees for arranging the mortgage. It is important to understand that rates and conditions among private lenders can vary significantly depending on the situation, scenario, and type of property. This is why it is essential to work with a mortgage broker who has access to a broad range of private lenders and understands their requirements and preferences.
Alternative financing can be quite beneficial for business owners who make every effort to reduce their taxable income and want to improve their credit profile before returning to traditional financial institutions.
The role of a mortgage broker is to convince lenders that the borrower does not represent a significant credit risk, including by adding certain written-off expenses back to net income in order to improve the debt-to-income ratio.
While having a strong credit history is very important, it is still possible to obtain a mortgage even if your credit is not perfect.
The challenge is that self-employed borrowers often do not have enough conventional documentation to verify their income. As a result, banks must conduct a more detailed review in order to protect themselves from increased risk.
The category of self-employed borrowers has been growing rapidly in recent years, as more Canadians try to build their own businesses, while new technologies make many operations more accessible to small business owners. However, banks continue to treat these clients with considerable caution.
Today, when financial institutions assess the income of potential self-employed borrowers, they compare it with average figures in the borrower’s industry. They take a closer look at the client’s employment history, previous experience, and past earnings. The income declared by the borrower must be realistic and consistent with the average numbers for that industry, the type of business, and the length of time the borrower has been operating in that field. For example, for a long-haul truck driver who does not own a truck, a realistic maximum income today may be around $80,000–$90,000 per year. The owner of several trucks with hired drivers, however, may earn much more, but contracts, personal tax returns, and corporate financial statements for several years would be required to convince the bank of the stability and profitability of that transportation business.
Banks examine the tax returns of self-employed borrowers more carefully and cautiously, focusing on written-off expenses — such as vehicle costs or advertising expenses — as well as on the reasons for any discrepancy between the income stated in the mortgage application and the information reported to the Canada Revenue Agency, or CRA. Today, the bank needs to understand and ask the entrepreneur: How did your earned income of $90,000 become $40,000 on your tax return? Please provide all necessary documentation so we can understand which expenses were written off.
Below are several recommendations for a successful mortgage application.
For self-employed borrowers, obtaining a mortgage is not always easy. However, there are several ways to make the process smoother:
Monitor your credit history: A strong credit history is one of the first requirements banks look for today when dealing with self-employed borrowers. Avoid having collection agency records appear on your credit report. In many cases, it may be safer to pay the debt even if you disagree with it, especially when dealing with telecommunications companies, and then resolve the dispute with the creditor through management or an independent regulator.
Save for a larger down payment: The minimum down payment for self-employed borrowers without traditional income confirmation is currently 10% of the property value for insured mortgages, where the property price is under $1 million, and 20% for alternative or private financing, or when the property value exceeds $1 million. The larger your down payment, the more comfortable the lender will be in approving your mortgage — and you may also save many thousands of dollars on default insurance.
Get your finances in order: A few months before applying for a mortgage, reduce your credit card and line of credit balances whenever possible. The debt service ratio is one of the key factors in evaluating your application.
Prepare all necessary documentation: Have complete tax documents for at least the two most recent years, showing your total reported income, tax payments, and written-off expenses. You will also need to provide the corresponding tax documents issued by the CRA. You may be asked for your business licence, articles of incorporation if you operate a corporation, HST registration, and financial documentation confirming stable cash flow into your business. Today, banks often request six months of business bank statements, client contracts, and work-related documents to demonstrate income sources. Provide proof of business activity — a website, samples of advertising materials, and recent paid invoices for business expenses. All of this helps convince the lender that your business is active and generating income.
And, of course, the best advice remains the same: start preparing for your mortgage in advance. Speak with a mortgage professional and have your situation reviewed ahead of time. The more information we have about you and your business, the more options we will be able to offer.
And do not be discouraged if the bank you have supported for many years declines your application. An experienced mortgage broker may not only be able to arrange financing for you, but also help you save thousands of dollars in mortgage payments. Most importantly, alternative financing can help you achieve your dream of homeownership, or access funds for current needs and new projects.