Don't Despair If Your Bank Rejects Your Mortgage Application

Finally, you have succeeded in finding your dream home. It perhaps has four bedrooms with separated gourmet kitchen as well as an en suite bathroom - furnished with jacuzzi tub. Now, you are just expecting your bank to sanction your mortgage application prior to beginning shopping for new furniture as well as stainless steel appliances. Suddenly, you receive the worst news that your bank has rejected your mortgage application.

Usually mortgage applications are turned down owing to a number of reasons, generally credit problems - for instance, a latest bankruptcy, irregular employment, having excessive debt, being behind on your bills and/ or insufficient income.

However, do not despair, if any of these reasons seems to be familiar in your case. When there is any difficulty related to your mortgage application, it does not imply that you will be continuing to reside in a rented house and paying some other person's mortgage for the remaining part of your life. In other words, having problems with your mortgage application does not mean you cannot own your dream home.

In case your bank rejects your mortgage application that does not imply that it is the end of the road for you to own a new home. According to mortgage brokering firm Invis Inc. regional sales manager Jim Rawson, even when your bank says 'no' there are several options open before you.

File an appeal

There is an ancient adage that says that if you don't succeed the first time, you should try again and again. This proverb is also pertinent in the case of mortgage applications, particularly when you are very near to closing. So, if your bank turns down your mortgage application, find out the precise hitch and the manner in which you may solve it. Once you have done the necessary corrections, once again ask the bank to go back over its decision.

Going by the recommendations of the leading real estate and secured lending firm TD Canada Trust vice-president Rick Mathes, you need to have a persistent lending officer even in the same bank where you have all or most of your financial transactions. He says that it is still possible to make the several contracts that are rejected in the first instance with a little bit of streamlining.

Go shopping

In the event of your bank maintaining that your earnings as a self-employed consultant does not somewhat support the mortgage you have applied for or if your credit history is a little dubious owing to the problems you had in servicing your student loan some years back, it is high time that you go to another financial institution for the mortgage. It would be even better if you used the services of a mortgage broker and allow him/ her to shop for mortgage on your behalf.

A survey conducted by the Canada Mortgage and Housing Corporation (CMHC) recently found that as much as 26 per cent of home buyers engaged the services of a mortgage broker during 2004.

Jim Rawson of mortgage brokering firm Invis Inc. is of the view that simply because one bank has rejected your mortgage application at times, it does not imply that you cannot do another transaction with a different major bank or financial institution. He said that his firm deals with every major lender and also minor trust firms, credit unions as well as private funds.

Find a guarantor

It is possible that you were not anticipating to get you dream house so soon and you have been at the job of finding your dream home only for three months. In such an instance, it is possible that the bank would also be cautious in approving your mortgage application provided someone with strong financial background endorses your application in the even of you becoming a defaulter. In this case, if you are unable to repay the loan, your guarantor will have to pay for it.

According to Rick Mathes of TD Canada Trust, getting a guarantor may prove to be a very powerful measure provided the guarantor has an excellent credit. In this case, to a great extent, the success of your deal would depend on the credit of the guarantor. Most probably, you would not want to get into this kind of arrangement unless you are compelled to do so - keeping in view your fairness to your guarantor. This is primarily owing to the fact that he/ she would be taking on themselves quite a large accountability.

Take a loan

In the event of your bank giving you an upper limit for your mortgage loan since your income does not back a hefty mortgage and your savings too is less that what you actually require to make the down payment, you may perhaps borrow some money to supplement for the deficit.

Referring to the down payment issue, CMHC national manager (underwriting) Mark McInnis said that they prefer that the down payment comes from the individual resource of the borrower. The underlying principle behind this is that if one puts the money together by himself/ herself, they have a greater vested interest in the residential real estate property they are purchasing.

Having said this, it may be mentioned that the CMHC presently permits resourceful applicants having excellent credit ratings as well as adequate income to utilize other sources too, for instance, funds borrowed from family or friends (earlier it had to come in the form of a gift from the lenders to the borrower) or lender incentives, for instance mortgage 'cash backs', for at least 5 per cent down payment.

Nevertheless, the entire debt service of the home buyer, for instance, their total monthly debt burden comprising costs of housing, car loans as well as credit card payments, cannot still be in excess of 40 per cent of their gross household income every month.

Cut back your mortgage

If you are purchasing your dream home at a whopping cost of $350,000, which is separate and in a new subdivision that would stretch you to such extent that you would only be able to make your monthly payments, you may perhaps also want to think over the choice of your dream home once again. Perhaps you may consider downsizing your aspiration to a semi-detached home and make an application for a smaller loan.

According to Rawson, in case you do not really have the money to make the payments, it is indeed a bad idea to get a mortgage. He is of the view that the most horrible thing is to get into a situation wherein you are going to be completely 'house-poor'. Rawson says that one ought to understand what he/ she is actually able to afford and be pragmatic regarding their goals.

Think about the options

There is no reason whatsoever to get upset if your bank turns down your application for a mortgage for there are several alternative sources from where you can still able to borrow money to buy your dream home. For instance, alternative lenders like the GMAC Residential Funding or the Home Trust Company support mortgages for people who have otherwise not been eligible to obtain a loan from any leading lender.

For instance, the Home Trust Company funds transactions for small-business owners as well as self-employed individuals who are not in a position to establish that they have sufficient income to be eligible with any leading banking institution. These may be people having considerable equity in their property, but do not have sufficient earnings or people having old credit problems like discharged bankruptcies or even new immigrants who do not have a credit history at all.

It is important to always bear in mind that while the interest rates with the alternative lenders are comparatively higher and frequently draws a parallel with the power of your mortgage application - the poorer your credit rating, the higher would be the rate.

Prior to submitting the application

If you intend to purchase a new home sometime in the near future, it is important that you commence working on getting your financial condition in order right away, since it would help to diminish the chances of your mortgage application being rejected.

At the same time, it is also important to bear in mind that buying a home is one of the major emotional as well as financial decisions that you would be making. Therefore, ensure that the time for buying your dream home is appropriate for you as well as your bank balance.

According to Mathes, you should not buy a home simply because your friend's house has gone up 50 per cent in the last five years. Instead, Mathes advices that you should buy a home since you are prepared to take the step owing to your standard of living as well as because you are confident that you are in a steady position with your job and can afford to make the payments timely.

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