Please note I am not a mortgage broker. The below is for information purposes only.
You decided to become a home owner, saved for a down payment, got pre-approved for a mortgage, found your dream home and made an offer.
Then, to your surprise and dismay, your mortgage application is denied. Hopefully, your offer was subject to mortgage approval!
yes, it is still possible for a mortgage to be denied after pre-approval
And it is not necessarily for the reason you think. A mortgage pre-approval is the maximum amount a lender would loan you, based on your income, down-payment and credit history.
Once you made an offer, the documents go through an Underwriter. The role of the Underwriter is to assess whether your loan request is an acceptable risk to the lender….or not.
Besides income and down payment, there is a crucial detail the Underwriter will focus on: the property itself.
a mortgage can be denied if there is an issue with the property
Lenders want to ensure their “investment” will provide a handsome return for as long as possible. They also want to make sure they are not overpaying and that the collateral – i.e. the property- is safe and sound.
In order to determine this, a lender will look at both the physical life and the remaining economic life of a property.
To simplify, it means the current state of the property and how repairs can extend its life. An appraiser is usually used to determine the above points.
If the appraisal doesn’t check out, the application is usually denied. For example, most lenders are wary about financing foreclosures, even if you do and pay for any repair.
the type of property can also cause problems
In Canada, most lenders ask for an appraisal for single, detached houses. If you are buying a condo, you are not necessarily off the hook either.
The underwriter will definitely take a look at the building history, finances and current conditions.
Too many tenants? Your application could be denied. Tenants do not have a personal stake in the building and can be perceived as detrimental by some lenders.
Building needs major repairs? Your application could be also be denied, particularly if the strata corporation does not have the money to pay for them.
Buying on plan? Potentially denied. A lot of lenders won’t finance “non-existent” properties, or will only finance if at least 70% of units are sold.
Mortgage underwriting is a complex process. Different lenders have different criteria. The industry is also heavily regulated and constantly changing.
If one lender denies you, try another one. If it fails, you will have to look at other properties, and although disappointing, it may not be a bad thing in the long run.