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What advice do you give when the bank turns them down?

So your clients tell you that they want to buy a new home or rental property. They went into their bank branch and were turned down for new mortgage financing. Now what should they do?

You could casually tell them to go down the street to another bank branch. Or you could say nothing at all, hoping that they drop this embarrassing subject. After all, if they were turned down by their bank there must be something wrong. You could console them and tell them to wait and try again next time. Or worst of all, you could tell them that maybe it simply was not meant to be. 

You can do better and so can they. 

Before they give up or run around to other financial institutions, suggest they do some homework.

The first step is to reconstruct the crime scene. Why were they turned down? It is unlikely that the bank loan officer who took their application will tell them the whole tragic story of mortgage financing gone awry. That overworked, underpaid person may not even know the whole story.

Why not help them figure out the reason for being turned down? Perhaps they have too much debt? If they have credit card debt, student loans, and massive car loans (cool car though, eh?), then they might not have the capacity to comfortably make the payments on a new mortgage.

Do your clients have a spotty credit history? Have they made late payments, engaged in cellphone company disputes (this is surprisingly common), and had other financial problems that have made their way to the two big credit reporting services in Canada, Equifax and Transunion? The details don’t even need to be true. There could be mistakes, inaccuracies, or old information that hasn’t been updated. Suggest immediately that they check their credit through a service like CreditKarma https://www.creditkarma.ca/ or through the credit reporting services https://www.consumer.equifax.ca/ or https://www.transunion.ca

Although the ranking systems vary slightly, if their credit score is below about 700, they will need to do some work to improve. Self-employed people and others who frequently use credit will have special challenges. As will people who have no credit or a minimal credit track record with the Canadian credit reporting agencies.

Another confidential question to ponder, what is their income and asset situation like right now? Are their jobs and business situations rock-solid, improving or declining, or uncertain? Do they have years of steady income, recent improvements that they are hoping to capitalize on, or occasional challenges? Consistent income over a long period usually generates a paper trail including tax documents. A portion of strong income and good financial management is generally converted into assets of one kind or another. What are these assets and if they don’t exist, wonder why not? There must be a story.

A fourth question is about the down payment for your client’s intended purchase. Sure, there are opportunities for making minimal down payments. For example, there are ‘insured’ mortgages for residential purchases that guarantee your mortgage to the mortgage lender. This insurance is required when your down payment is 20% or less of the property purchase price. These insured mortgages have stringent requirements that we won’t get into here.

However, low down payment mortgages mean that your clients have limited available cash for their real estate purchase. These also mean that they have limited investment in the transaction. That $100,000 may be a very significant sum for your clients. For the financial institution, it does not represent a large percentage of the value of a million dollar property. 

Is it possible for your clients to improve the amount of their down payment? Is there another mortgage lender that might be more amenable to the down payment that they do have? Is the timing right on their purchase? Or should they be looking for a less expensive property?

You probably do not want to attempt to answer these questions on your own with the clients unless you are regularly involved in mortgage transactions. Better to have them speak with a mortgage broker who regularly deals with these situations.

An experienced mortgage broker may even have some ideas about the reasons a particular financial institution turned down a mortgage application. They may know another source for the mortgage financing. To the general public, Canadian banks and other financial companies look pretty much the same. There are significant differences among them. They change regularly. 

A mortgage that might have been approved easily at one lender is now impossible, but another lender is now choosing to do just that exact type of mortgage you are looking for. Or vice versa.

The connected mortgage broker is part of a vast mortgage lending ecosystem that probably includes people at your client’s bank. The mortgage broker will study your client’s situation and find an appropriate home for their mortgage application. This process usually doesn’t cost the client anything. Typically, lenders pay brokers for bringing in applications.

The mortgage broker will be able to tell your clients if there just isn’t a place out their for their mortgage, or if the timing is off, or what they need to do to get the mortgage that they are looking for, or if there is a temporary financing arrangement that can eventually be replaced by something more suitable.