Did you recently receive a loan rejection letter? In today’s tight Canadian credit market, there are many reasons why your application may have been rejected, as lenders become stricter about their criteria.
If you want to learn about why your loan application in Canada was rejected, or if you are interested in obtaining a loan, your eligibility and qualifications will be based on three main criteria:
1) your credit score; 2) your income; and 3) your debt and expense obligations. These are the main reasons that you could be denied for a Canadian loan:
1) Low FICO Score
Before you apply for a loan, check your FICO score. Your FICO score is a number that represents your credit worthiness from one of the leading credit reporting agencies. Your score is determined by how many late payments have been reported to the agency, your balance with all creditors, and any judgments or collections that show on your credit report. A low FICO score could mean a much higher interest rate due to the increased risk or disqualification altogether.
There are ways to raise your FICO score, however. You don’t have to settle for a score that has been assigned to you. Start repaying your credit card debt right away. A good strategy is to get all your credit card balances below 20% of their maximum limit. Resolve any collection conflicts and have them report your payment in full to the reporting agency. Even just a few small steps can increase your FICO score to a point where you are eligible for a loan.
2) Not Enough Income
Loans are underwritten and approved in part by your ability to repay the loan as determined by the lender. If your regular income does not satisfy the specifications of the lender, your loan can be denied.
Lenders look at your after-tax income, or your actual spendable income, when determining your eligibility. Your income must be enough to pay the monthly installment of the loan, as well as all other committed debt payments, such as car loans and credit cards, and all your normal household expenses. Generally, your regular monthly income must be at least three times your mortgage payment.
As an example, if a potential borrower earns $2,400 per month after taxes, a mortgage payment cannot exceed $800, and it may be even less depending on the current debts that the borrower has.
3) Too Much Debt
Loan applicants can be denied based on too much debt. Mainly this happens when a potential borrower has an auto loan and multiple credit cards with high balances. A lender could determine that your income is not enough to meet these debt obligations in addition to a potential mortgage payment.
You can lower your monthly debt obligation by removing some of the regular debt expenses. Pay off one or more credit card balances. Or pay a car loan in full. If you have money for a home down payment, it could be better spent lowering your debt obligation to help get you qualified for a loan.
Other Potential Reasons For Denial
4) Not Employed Long Enough
Even though your income may meet loan criteria, you may not have worked long enough at your current employer to satisfy the lender. Lenders like to know that you have been and will be employed steadily and indefinitely in the future. If you have a history of working short-term jobs, in the eyes of a lender, your regular income is spotty and could lead to late payments or default.
5) Previous Foreclosure
If you have previously owned a home that fell into foreclosure, you could be denied for another loan. Even if you have improved circumstances, such as paying all your debts and obtaining a great paying job, a previous foreclosure is a black mark and a red flag to lenders that could mean a repeat play in their underwriting eyes. However, don’t let a previous foreclosure prevent you from trying again. Many lenders may still approve a new loan if your current status is clear, and you can provide satisfactory statements as to why the previous foreclosure happened.
6) High Tax Area
You may be denied a home loan based not on the home price, but on the yearly tax assessments. Real estate properties in Canada are taxed based on provincial and city assessment rates, and in some high-demand areas, the rates can be extreme. Even though you may find an affordable home for which you can meet mortgage payments, a lender may determine that your income is not enough to establish a monthly escrow for property taxes.
7) False Information
Lenders will check the information you provide on an application. If you provided false information, such as inflated income, or tried to hide debts, then you can be sure that a denial is likely to follow. Be completely honest and up-front when you disclose information about your income, work history, and debts.
Though there are many reasons for a loan denial, there are always ways you can improve your situation to get a better answer next time. Look closely at the reasons provided above. If you have been denied, improve your credit, pay off debt, or find ways to increase your income. Don’t let a denial stop you from trying again.