Can My Mortgage Renewal Be Denied?
When you become a homeowner, your mortgage renewal should always be in the back of your mind, whether it’s 6 months or 5 years away. And, when the time comes to renew your mortgage, one very important thing you need to ask yourself is: are there any reasons why mine might be denied? Actually, there are a few reasons why your mortgage renewal might be denied, either by your current lender or a new lender should you decided that changing lenders is a good option for you. In the article below, we’ll talk a little bit about the mortgage renewal process, the reasons why yours might get denied, and what you can do if it does.
Thinking about borrowing using your home equity? Read this first.
Check out this infographic for everything you want to know about the cost of buying a house in Canada.
Renewing Your Mortgage
Before we discuss the reasons why your renewal might be denied, it’s good to get a basic idea of how to renew your mortgage in the first place. Several months prior to the end of your first term, you should receive a letter from your lender, notifying you that your mortgage contract is up for renewal. You can then make an appointment to discuss it with them, during which they’ll review your finances and decide whether you qualify for renewal. If you do qualify but aren’t satisfied with the rates your current lender offers, you can choose to switch lenders. If you are thinking about finding another lender, you can start by:
Researching Other Lenders
It’s very important to know exactly when your mortgage will be up for renewal, not just for the obvious reasons, but also so that you can have the option to shop around for other lenders. Who knows, you might be able to qualify with a new lender who offers a more reasonable interest rate. Since there will likely be a vast number of banks, mortgage brokers, and other lenders in your province alone, you should start researching a few months in advance. You can contact them and ask for an assessment, then make your decision afterward based on what each lender offers you.
Want to know why different lenders offer different mortgage rates? Find out here.
Think About Your Financial Situation
As soon as you become a homeowner, you’ll start to get an idea of just how much your home will cost you right now and in the future. So, before choosing to renew your mortgage with your current lender, or switching to a new one, make sure you’re considering all factors. Does your current mortgage rate suit your financial needs? Will the rates of your new lender suit your financial needs? What will you need to do if your mortgage is too costly and you need to sell your house?
Renew Your Mortgage or Switch?
When the 30-day mark rolls around, you should start getting ready to make your decision. If you’ve done enough research to decide that your current lender is satisfactory, you can set up an appointment with them, discuss your contract, find out if you qualify for renewal, and resign your contract.
However, if you decide to switch lenders, it’s important to know about the extra costs associated with that process. First, you’ll need to submit a whole new application, wherein your finances, credit, and background information will be checked and reviewed. If you’re approved, you’ll have to pay certain fees, such as the appraisal of the property, a fee to terminate your contract with your current lender, an assignment fee for your new contract, and a slew of legal costs. So, if this is your choice, just make sure you have enough saved up for both the switching process and whatever other expenses the future might have in store for you.
Reasons Why Your Current Lender Might Deny Your Mortgage Renewal
In Canada, a typical mortgage term is between 6 months and 10 years, during which you’ll have a contract with a single mortgage lender, who will charge you a particular rate. If you have a high ratio mortgage, meaning you initially made a downpayment on the house of less than 20% of the asking price, you will have to purchase default mortgage insurance and will have a maximum amortization period of 25-years. If your mortgage is low ratio, and you made a downpayment of 20% or more, you won’t need to pay for mortgage insurance and will have a maximum amortization period of 35 years.
Actually, the most common mortgages in Canada have an amortization period of 25 years, and a fixed-rate mortgage term of 5 years. During that term, a homeowner will make monthly mortgage payments, interest included, and at the 5-year mark, will need to either renew their existing mortgage with their current lender or shop around for another if they’re denied or simply want to find a better rate. Since changing lenders can come with its own drawbacks, as we’ll discuss in the next section, many homeowners will stick with the comfort of the lender they’re already doing business with. And, if you’re a homeowner who wishes to do the same, and has been keeping up with your mortgage payments, making them on time and in full, you shouldn’t have a problem getting your contract renewed.
However, lenders will most commonly reject a mortgage renewal request if a homeowner has been missing their monthly payments. In fact, if you fail to make your mortgage payments, not only will you be denied a renewal, but you could go into default and be at risk of foreclosure. You should also be aware that whenever your mortgage term is up, your lender will reassess your financial health by reviewing your credit report and credit score. Doing this tells them if you’ve been having debt or other financially related problems, and how much of a default or bankruptcy risk you’ll be in the near future. So, even if you’ve been keeping up with your monthly payments, if you’re showing signs of financial distress, your mortgage renewal could be denied.
Reasons Why a New Lender Might Deny Your Mortgage Renewal
As we mentioned earlier, some homeowners decide to switch to a new lender if they offer a better mortgage rate. Then again, some are forced to switch when their current lender denies their renewal altogether. If you happen to be switching lenders, it’s very important to know that there are situations where that potential new lender might deny your renewal request.
One area where a potential lender might reject a mortgage renewal request is during the qualifying process. As we mentioned above, whenever you apply for a renewal with any lender, you’ll have to fill out an application, wherein your finances will be reviewed, and the lender decides if you qualify with their standards. If it appears as though you’ll be able to make your payments regularly, you’ll have an easier time qualifying than someone who’s had debt problems, or a record of missing mortgage payments.
In fact, if they qualify, many homeowners will just renew with their current lender, simply because the standards of a new lender might be tougher to meet. If that new lender reviews your profile and sees that you’ve missed any mortgage payments in the past, it could easily lead to a rejection. The same thing could happen if they see you’ve racked up a lot of debt, have been changing jobs frequently, or defaulted on any other loans or credit products. These are things that need to be thought about before your mortgage is up for renewal. If you’ve been denied by your current lender for any reason, you may have no choice but to find a private lender that caters to those with bad credit, or sell your home entirely. But, if your current lender’s rates are the only reason that you’re thinking of switching, it might actually be safer to stay with them for the time being.
Check out this infographic to learn how a bridge loan can help you get the mortgage you want.
What You Can Do If You’re Denied For a Mortgage Renewal
Whatever the reasons might be, if your mortgage renewal does get denied, know that you aren’t alone, and there are a few things you can do to handle this situation.
If your current lender denies your mortgage renewal
The majority of mortgages are provided by companies and organizations sometimes known as “A-list” lenders, such as banks and traditional financial institutions (Royal Bank of Canada, TD Canada Trust, Bank of Montreal, etc.), and other accredited mortgage lenders. Both these kinds of lenders will offer different rates. However, because these lenders have higher standards of approval for both mortgages and renewals, it can be hard to qualify with them. So, if your mortgage renewal gets denied by your current lender, the first thing you can do is apply with a new lender.
If both your current and new lenders deny your mortgage renewal
If you’ve been shopping around, but are still unable to meet the requirements of both your current lender and would-be new lenders, it’s probably because your financial situation is not up to their standards. If this is the case, you can try applying with “B-list” lenders, otherwise known as trust companies and bad credit institutional lenders. These organizations deal in mortgages and other kinds of loans for borrowers who have poor credit, or who make less income than is required by a bank or typical mortgage broker.
The problem here is that while their standards might be lower, the mortgage rates of B-lenders are higher because of the amount of risk they’re taking by lending to someone with financial difficulties and poor credit. If your financial situation happens to be worse than both the A and B lenders’ qualification standards, you may need to move on to more drastic measures.
Click here for more information on missed mortgage payments and foreclosures.
If both A and B lenders deny your mortgage renewal
If your credit score is extremely low and your financial situation is worse for wear, it might be time to consider the following two options to avoid your house being foreclosed.
First, discuss your situation with a private lender. Some homeowners choose private mortgage lenders because they have similar benefits to traditional lenders, but their qualification standards are more reasonable. The problem here is that private lenders are less regulated and their rates are often higher than banks and other traditional lending institutions. Also, scam artists sometimes establish fake companies, then use the desperation of borrowers with poor credit, against them. With the hopes of renewing their mortgage for as long as possible, many of those would-be borrowers will fork over all their personal and financial information, even going so far as to purchase fake “mortgage insurance.” So, not only will a borrower’s information be compromised, but whatever finances they have are then open to theft.
The final path you can take if your mortgage renewal is denied by both A and B lenders, and you haven’t found a trustworthy private lender, is to sell your house and downsize to something more cost effective. This might not be a pleasant or convenient option, but it’s likely better than suffering the consequences of bankruptcy and eventual foreclosure on the whole property. You might have a hard time getting every penny the property is worth, but at least you’ll be able to salvage part of your investment, then avoid bankruptcy until you can save up enough money to try your hand at another mortgage.
Need to sell your home to become debt free? Read this.
Talk to Your Current Lender Before Making Any Decisions
If you think you might be at risk of defaulting on your mortgage payments and getting your renewal rejected by your current lender, it’s a good idea to speak to them first, before jumping to any conclusions. Any good lender will negotiate with you for a more reasonable rate that suits your financial needs. If you’re thinking of switching providers, do a lot of prior research, then discuss the switching process with your current lender. If you feel like switching is a viable option, and your new lender approves your renewal, you could find yourself with a better monthly rate and be one step closer to paying off your mortgage in full.