Can't Get Approved for a Mortgage? Here's Why

Struggling to get a mortgage in Canada? Here's what you need to know upfront:

Credit Score Matters: A score of 680+ gets you the best rates. Anything below 650 makes approval harder.
Debt Ratios: Your housing costs (GDS) should be under 39% of your income, and total debts (TDS) must stay below 44%.
Down Payment Rules: You need at least 5% for homes up to $500,000, but 20% is required for homes priced at $1M+.
Income Stability: Lenders want steady income and may scrutinize self-employment or fluctuating earnings.
Common Reasons for Denial: Low credit scores, high debt, insufficient down payments, or missing documents.

Quick Tips to Improve Approval Chances:

Fix Your Credit: Pay bills on time, reduce credit card balances, and avoid new debt.
Save More: Use tools like the FHSA or RRSP withdrawals for your down payment.
Organize Documents: Prepare proof of income, savings, and employment verification early.
Explore Alternatives: Consider credit unions or private lenders if traditional banks decline.

The mortgage process can be tough, but with preparation, you can boost your chances of approval.

Don't Get Denied By CMHC | Tips To Ensure Your Application Get's Approved EVERYTIME!

CMHC

What Lenders Look for When Approving Mortgages

Canadian lenders take a close look at your financial situation to decide if you can handle the responsibility of a mortgage. Here's a breakdown of the main factors they consider.

Credit Score Requirements

Your credit score plays a big role in determining the mortgage rates you qualify for. In Canada, a score of 680 or higher can get you the best rates [3]. If your score is between 600 and 680, you might still get approved, but expect higher interest rates [3].

Credit scores are generally categorized as follows by Canadian credit bureaus like Equifax:

Good: 660 to 724
Very Good: 725 to 759
Excellent: 760 and above [4]

Keep in mind that even a single missed payment can drop your score by as much as 150 points [3].

"A good credit score is key for financial success. Understanding its factors and taking steps to maintain it leads to better financial health and stability." – Scotiabank [2]

Income and Debt-to-Income Ratio

Lenders want to be sure you have a steady income that can cover your mortgage payments and other debts. To assess this, they look at your debt service ratios.

Gross Debt Service (GDS): This measures your housing costs, including mortgage payments, property taxes, heating, and part of your condo fees (if applicable).
Total Debt Service (TDS): This includes your GDS costs plus other debts like credit cards, car loans, and student loans [5].

Both ratios need to meet the lender's standards, and you'll also need to pass a mortgage stress test to ensure you can handle potential rate increases.

Down Payment Requirements

The size of your down payment is another critical factor. In Canada, the minimum down payment depends on the home's purchase price. A larger down payment not only reduces the amount you need to borrow but also signals to lenders that you're financially responsible. Interestingly, about 30% of Canadian homebuyers receive help from family members for their down payments [7].

Documentation and Employment Verification

Lenders will ask for a variety of documents to verify your identity, income, savings, down payment, and property details [6]. The exact requirements vary depending on your situation. For example, if you're self-employed, you'll likely need to provide more detailed financial records compared to someone with a salaried job.

Having your documents organized and up to date can make the approval process smoother. Missing or outdated paperwork can lead to delays or even rejection [6]. Employment verification is also a big part of this process - lenders may contact your employer or request additional proof if there are any gaps or recent changes in your job history.

Why Canadians Get Denied for Mortgages

Understanding why mortgage applications get rejected can help you sidestep common mistakes and improve your chances of approval. Here are the main reasons Canadians often face mortgage denial.

Low Credit Score

Your credit score plays a big role in whether lenders approve your mortgage. Most lenders look for a score of at least 650 to offer favourable terms [8]. While the Canada Mortgage and Housing Corporation (CMHC) lowered its minimum credit score requirement from 680 to 600 as of July 5, 2021 [3][10], this doesn't mean borrowers with lower scores get the best deals. If your score falls below 600, you’ll likely need to put down at least 20%, and every 20-point drop in your score could mean higher interest rates [3][10].

Credit Score Range	Mortgage Approval Likelihood
800 - 900	Excellent
720 - 799	Very Good
650 - 719	Good
600 - 649	Fair
Below 600	Poor

The average credit score for Canadian borrowers was 762 as of April 2023 [10]. This shows that most approved applicants have scores well above the minimum threshold.

Income Problems

Inconsistent income or challenges tied to self-employment are common reasons for failing the mortgage stress test [9]. This test ensures you can handle potential rate increases, which can be tricky if your income fluctuates. Lenders also assess whether your income meets their debt service ratio requirements.

“Income stability is key. Lenders want to see a consistent income stream to ensure you can meet your mortgage obligations.” - Gurpartap Dhami, Mortgage Agent Level 1 [8]

Too Much Debt

High debt levels can make lenders hesitant to approve your application. Your debt-to-income ratio should ideally stay below 43%, and your Total Debt Service (TDS) ratio should be under 44% [8]. Many Canadians overlook how payments for credit cards, car loans, and student debt can affect their mortgage eligibility. Keeping these debts in check is just as important as saving for a down payment.

Not Enough Down Payment

A lack of sufficient savings for a down payment is another major hurdle for homebuyers. In Canada, the minimum down payment depends on the home’s price:

5% for homes priced at $500,000 or less
5% on the first $500,000 and 10% on the portion above $500,000 for homes priced between $500,001 and $999,999
20% for homes priced at $1 million or more [8]

For example, buying a $600,000 home requires at least $35,000: $25,000 for the first $500,000 and $10,000 for the remaining $100,000. Many buyers, especially in high-cost areas, struggle to meet these savings requirements.

Missing or Wrong Documents

Submitting incomplete or incorrect paperwork can delay or even derail your mortgage application. This is especially true for self-employed individuals who need to provide detailed financial records. Even minor errors, like an outdated employment letter or an incomplete tax return, can slow down the process significantly.

The silver lining? A mortgage denial doesn’t mean the end of your homebuying plans.

“A mortgage decline from a bank is often just the beginning of your homebuying journey, not the end. With the right guidance, many of our clients find success with alternative lenders or by improving their applications.” - Rick Sekhon, Mortgage Broker [8]

Alternative lenders, such as credit unions and private lenders, may offer more flexibility than traditional banks:

Lender Type	Interest Rates	Flexibility	Best For
Traditional Banks	Lowest	Low	Borrowers with strong credit
B-Lenders	Higher	Medium	Those with fair credit
Private Lenders	Highest	High	Challenging cases, short-term
Credit Unions	Competitive	Medium	Local members, unique situations

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How to Improve Your Chances of Getting Approved

Now that you understand why mortgage applications get rejected, let’s dive into actionable steps to strengthen your application. These tips address common hurdles and can help you present a stronger case to lenders.

Fix Your Credit Score

Your credit score plays a big role in getting approved for a mortgage. Since payment history makes up 35% of your credit score and credit utilization accounts for about 30% [13], focusing on these areas can make a big difference. Start by paying all your bills on time and keeping your credit card balances under 30% of your credit limit. For example, if your credit limit is $10,000, aim to keep your balance below $3,000.

Avoid opening new credit accounts too often. If you’re shopping for a mortgage, try to get quotes from different lenders within a two-week window to limit the impact of credit inquiries [1].

Keep older credit accounts open and active to maintain a solid credit history. Having a mix of credit types - like a credit card, car loan, and line of credit - can also work in your favour.

To stay on top of your credit, regularly monitor your credit report using free tools like Borrowell or Credit Karma [11][12].

"As a Borrowell member, you will receive personalized tips, articles and tools to help improve your credit." – Borrowell [11]

If you’re just starting to build credit, Borrowell offers a Credit Builder program for $10 per month over 36 months, with $240 returned to you at the end [14].

Once you’ve taken steps to improve your credit, you can focus on boosting your income or reducing your debt to further improve your chances.

Increase Income or Pay Down Debt

Lenders want to see that you can handle a mortgage alongside your other financial obligations. You can improve your financial profile by increasing your income or reducing your debt. Consider asking for a raise, working overtime, or picking up a side hustle. At the same time, focus on paying off high-interest debts like credit cards and personal loans first [17].

"Canadians are great at finding creative ways to earn more money for their family. As a lender in these cases, we're looking for reasonable income that shows a consistent pattern and can be documented for the last three, six, nine or 12 months." – Grant Armstrong, head of mortgage originations at Questrade Financial Group's Community Trust Company [15]

Be sure to document any additional income sources consistently. If you have multiple debts, consolidating them into a single, lower-interest payment might make sense financially [16].

If family members contribute to household expenses, document these payments, as they may count as contributory income [15]. For self-employed applicants, certain business expenses might be added back to your qualifying income. Non-taxable income, such as foster care payments, could also be "grossed up" to improve your eligibility [18].

Save More for Your Down Payment

After addressing your credit and income, focus on saving for a larger down payment. A bigger down payment reduces the amount you need to borrow and shows lenders you’re financially prepared [19]. Use tools like Wealth Awesome's affordability calculator to determine a realistic savings goal.

Make saving easier by automating it - direct 5–20% of each paycheque to a dedicated account for your down payment [19]. Take advantage of tax-friendly accounts designed for homebuyers:

The First Home Savings Account (FHSA) allows you to contribute up to $8,000 annually, with a lifetime limit of $40,000 [19].
The Home Buyers' Plan lets you withdraw up to $60,000 tax-free from your RRSP [20].
TFSA contributions grow tax-free and can be withdrawn without penalties [19].

If you receive a windfall, like a tax refund, bonus, or monetary gift, consider depositing it directly into your savings for your home.

Get Your Paperwork Ready

Finally, make sure your documentation is complete and accurate. Missing or incorrect paperwork can delay or even derail your mortgage application. Start gathering these documents early to avoid last-minute issues [20].

You’ll need basic identification, such as government-issued ID and your Social Insurance Number, as well as proof of income, including recent pay stubs, T1 General forms, Notices of Assessment for the last two years, T4 forms, and a letter from your employer confirming your job details and salary.

For financial documentation, collect bank statements from the last one to two months, investment statements no older than 90 days, and proof of your down payment funds. If you’re self-employed, prepare three years of income records, along with business licenses or articles of incorporation if applicable [20].

When you’re ready to make an offer on a property, you’ll need additional documents, including the purchase and sale agreement, MLS listing, homeowner’s insurance policy, and lender’s title insurance. Double-check everything for accuracy and keep your paperwork organized in one place. Also, remember that closing costs typically range from 3% to 4% of the home’s purchase price [20].

Tools and Resources for Canadians

If you're looking to strengthen your financial profile and make the mortgage application process smoother, there are several tools tailored specifically for Canadians. These resources can help you monitor your credit, save for a down payment, and better understand mortgage requirements.

Wealth Awesome

Wealth Awesome is a go-to platform for mortgage calculators and financial insights. Their affordability calculators are particularly helpful, giving you a clear idea of what home prices align with your income and debt levels. They also offer mortgage rate comparisons, showcasing the latest rates from lenders across Canada. Beyond mortgages, the platform dives into topics like stress testing and amortization, breaking them down into easy-to-understand advice. Plus, they provide tips on investments and tax-saving strategies, making it a versatile resource for financial planning.

Borrowell

Borrowell is one of Canada’s top free credit monitoring services, providing weekly credit score updates using Equifax data. It offers personalized recommendations to help improve your credit profile and sends alerts for any changes to your credit report.

"Checking your free credit report with Borrowell won't hurt your credit score." – Borrowell [21]

Borrowell also features a Credit Builder tool and educational content to help you strengthen your credit history. With bank-level security and free access to credit scores and reports, it’s a reliable option for keeping tabs on your credit. The weekly updates are especially useful for spotting errors or unusual activity quickly.

Government of Canada Resources

The Financial Consumer Agency of Canada (FCAC) offers free tools to help you prepare for mortgage approval. Their Budget Planner tool helps you create a detailed, personalized budget, while the Financial Goal Calculator is designed to assist in saving for a down payment [22][23].

Canada.ca, the official government website, is another valuable resource. It provides details on programs like the First Home Savings Account (FHSA), which allows you to save up to $40,000 tax-free for your first home [24]. You can also learn about the updated Home Buyers' Plan, which now lets you withdraw up to $60,000 from your RRSP [25]. Additionally, many provincial and territorial governments offer homebuyer incentives, such as land transfer tax rebates, to help cut costs.

Provider	Updates Every	Cost
Borrowell	Week	Free
Credit Karma	Week	Free
RBC	Month	Free for clients
Scotiabank	Month	Free for clients
Equifax Complete Premier	Daily	$19.95/month

Key Points for Getting Your Mortgage Approved

Securing a mortgage in Canada requires preparation, financial discipline, and a solid understanding of what lenders are looking for. With lending requirements becoming stricter, having a clear strategy can make all the difference in overcoming common challenges.

A strong credit score is a cornerstone of mortgage approval. Major banks typically look for scores above 680, while private lenders may consider scores as low as 550. To improve your score, focus on reducing debt to keep your credit utilization below 30%, make payments on time, and avoid closing older credit accounts, as these contribute to your credit history [26].

Lenders also place significant emphasis on debt service ratios. This means your housing costs and total debts must fall within acceptable limits, showing that you can comfortably manage mortgage payments alongside other financial obligations.

Building a larger down payment can strengthen your application and lower your overall costs. For instance, a bigger down payment can help you avoid mortgage insurance premiums. Federal programs like the First-Time Home Buyers' Plan allow you to withdraw up to $60,000 tax-free from your RRSP to use as a down payment, making homeownership more attainable [27].

Getting your documents in order early is another critical step. Missing or incomplete paperwork is one of the main reasons for delays in mortgage approval, according to the Canada Mortgage and Housing Corporation (CMHC) [26]. Collect your bank statements, pay stubs, tax records, and employment verification well in advance. You might also want to consider getting pre-approved to identify and address potential issues upfront. Expert advice can be invaluable in ensuring your financial profile aligns with lender expectations.

Working with a mortgage broker can simplify the process. Brokers have access to multiple lenders and can help you navigate the complexities of today’s mortgage market. As Jared Stanley, Senior Director of Originations at Neighbourhood Holdings, explains:

"Mortgage brokers are becoming more than just deal-makers - they're financial strategists, problem-solvers, and borrowers' best hope for navigating an increasingly restrictive mortgage market." [28]

Finally, demonstrate employment stability by maintaining consistent work history over the past two years [26]. Avoid taking on new debt during the application process, and be realistic about what you can afford. This might mean considering a smaller home or a more affordable area to avoid stretching your finances too thin.

FAQs

What steps can I take to improve my credit score and boost my chances of getting approved for a mortgage in Canada?

Improving your credit score is a smart move if you're looking to boost your chances of getting a mortgage in Canada. The first step? Pay your bills on time - every time. Even making the minimum payment can make a big difference since your payment history carries the most weight in determining your score.

Another key tip is to keep your credit utilization below 30% of your available credit. In simple terms, avoid maxing out your credit cards. If you can, hold onto older credit accounts. A longer credit history can give lenders more confidence in your financial habits.

Finally, try to limit how often you apply for new credit. Multiple credit inquiries in a short time can drag your score down. Stick to these habits consistently, and over time, you’ll strengthen your credit profile and improve your chances of securing that mortgage.

What can I do if my mortgage application is denied by a traditional bank in Canada?

If a traditional bank in Canada turns down your mortgage application, don’t lose hope - there are other avenues to explore. Options like private lenders, credit unions, and B lenders often have more flexible criteria, making them worth considering. You might also want to connect with a mortgage broker, who can help find solutions tailored to your situation. If purchasing a home outright isn’t immediately possible, a rent-to-own arrangement could be another path to explore.

Before diving into these alternatives, take some time to understand why your application was denied. Common reasons include a low credit score, a high debt-to-income ratio, or missing documentation. Addressing these issues can significantly improve your chances of approval. Steps like reducing your debt, improving your credit score, or seeking guidance during the pre-approval process can also set you up for better success when applying for financing in the future.

How much should I save for a down payment on a home in Canada?

In Canada, the amount you need for a down payment varies based on the home's price. If the home costs $500,000 or less, you'll need at least 5% of the purchase price. For homes priced above $500,000, the calculation changes: you'll need 5% on the first $500,000 and 10% on the portion exceeding that amount. However, if the property is priced at $1,000,000 or more, the minimum down payment jumps to 20% of the purchase price.

To make saving for your down payment more manageable, it’s a good idea to plan ahead. Setting a budget, exploring savings tools, or seeking advice from a financial advisor can help you stay on track and reach your goal.