Three tips for buying a property when the bank says “NO”

BY CLEVE DESOUZA

COVID-19, and the “new normal” that this global pandemic has created, has greatly impacted the way that Canadians live life. One such area is in the realm of real estate and mortgage lending. Despite historically low-interest rates, people who want to buy a home right now might be struggling to qualify, largely due to massive price inflation.

Statistics Canada’s Residential Property Price Index (RPPI) shows that overall home prices were up across six major metro areas about 13.5% in the 2^nd quarter of 2021, when compared to the same quarter in 2020. Toronto, specifically, showed home price increases of about 12.4%. Compare this to the typical wage increase of about 2.0% that the Conference Board of Canada indicates was the national average, and you can easily see why there is a struggle.

The question, then, becomes how can a prospective homebuyer qualify for a property when the bank says “NO”? Here are three tips that can help provide a solution.

Tip #1 – Make adjustments to your mortgage request
When you get denied for a mortgage, the bank may explain their reasoning for the decline. If they do not, you can always ask them for an explanation. If you take the time to understand which of your “metrics” was problematic for their underwriter, it may be possible to make small adjustments and then resubmit the loan again for another review.

Many times, Canadians are denied a mortgage for a very minor problem. Things like paying off a small debt, having an error resolved on your credit report, or choosing a homeowner’s insurance policy with a lower premium could be just what is needed to turn a decline into an approval.

Tip #2 – Partner with a mortgage broker
When you apply for a mortgage loan with a bank, you typically will be assigned to work with an in-house representative. However, that person will usually be limited to offering you only the options provided by the specific bank they work for.

Alternatively, you can choose to engage with a mortgage broker who works independently. These brokers are typically not nearly as limited and can research and provide options from a wide range of financial intermediaries. More options often mean a broader ability to qualify. Mortgage brokers may also be able to help you make adjustments to your application, to meet specific requirements of banks or lenders.

Tip #3 – Consider using an alternative lender
Banks tend to be more rigorous in their application process than other lenders, this is largely due to their risk profile. Banks are very risk-averse, meaning that they only loan money to applicants and on properties that they feel are extremely unlikely to fail.

Alternative lenders, on the other hand, tend to be more tolerant to risk. This means that borrowers who are self-employed, or who have some negative credit history, are more likely to qualify with an alternative lender.

Interest rates on these types of loans do tend to be a little higher than bank rates, but alternative lending can be a great avenue to help someone get into a home today. Once the property has had time to appreciate in value and build equity, and the borrower has had time to make changes to their credit or income profile, refinancing into a bank loan at a lower rate is much easier.

Big picture planning is key
Buying a home is a process, and the rules of how that process works seem to be ever changing. As real estate market demands fluctuate, interest rates rise and fall, and lending practices are revised, it is important to have a “big picture”-planning model for your finances. While getting into a home today might be the priority, remember that buying a house is never “just” about buying a house. It’s about building equity, preparing for the next phase of life, and achieving financial goals for the future.