Getting rejected about anything doesn't feel good.
But it feels even worse when your hopes and dreams of buying a home come crashing to a halt.
So what do you do when this happens?
Do you throw in the towel and exclaim "I'll never be able to buy a home!"
No! At least I hope you don't.
There is almost always a solution to every problem, and I'm here to show you that there is a way to buy a home, even if the bank has said no.
In this post I will outline the most common reasons for your mortgage application being rejected. Then I'll share some options you have to get you into homeownership.
Top Reasons Your Mortgage Application is Rejected
The reasons that your mortgage might get rejected are vast. And what makes it even more complicated is that every bank has their own unique requirements. But generally speaking, the most common reasons that your mortgage is rejected include:
Poor credit score
A poor credit score is reflective of your debt repayment behaviour. If your score is poor, the bank sees you as a liability who might not pay them back on the agreed upon terms. And who wants to lend someone money who won't pay them back on time? But don't worry, this can usually be fixed!
Not enough credit history
When you have a short credit history, the bank doesn't feel confident that you are trustworthy of making your payments to them on time and in full. They typically want to see at least 2 years of credit history (along with a good credit score) to feel confident loaning you hundreds of thousands of dollars. Again, totally fixable with time.
High total debt service ratio (TDS)
This measure looks at your debt obligations relative to your income. Typically the bank wants this to be between 38-40%. If your TDS is greater than 40% (ie. your expenses are equal to 40% of your income), they see this as risky and may not want to lend to you even if your credit score is good. Again, totally understandable but fixable too!
"Risky" employment
The bank considers self-employed persons to be risky. And people who have recently started a new job or those who frequently change jobs. They believe there is a lack of income stability in these cases and therefore assign risk to these people. It's my opinion that these things aren't inherently risky. It's a reality of this day and age that people change jobs or work for themselves. So it becomes a matter of recognizing that the bank perceives this as risky and then knowing what to do to make the bank feel more comfortable. More on that later.
Other explanations
Beyond this, maybe your credit score is decent but you just don't have a large enough down payment for the type of home you are looking to purchase. In this case the bank might approve you but not for a large enough mortgage to purchase the home you were looking for. Bummer. And again, fixable.
A rejection shouldn't mean this is the end of your homeownership journey
Even after you've been rejected by the bank, there are a few options that can help you buy a home. Let's talk about them.
Option 1: Private Lending
Private Lending is one option where you borrow funds from an individual rather than a financial institution like a bank or credit union.
But there's a catch.
Interest rates on these types of loans can be very high.
Much higher than you'd get from a bank.
So eventually you want to be able to refinance with a big bank to take advantage of a lower interest rate.
And you better have a solid plan in place to ensure you can pay off your private lender and get a mortgage with the bank sooner than later.
But don't worry, Private Lending isn't your only option.
Which brings us to Option 2.
Option 2: Rent to Own
Rent to Own is another option that allows you to live in a home of your choosing, rent it, and then purchase it at a pre-determined future date for an agreed upon price.
This is a great option, especially if your reason for being rejected is due to credit issues or "risky" employment status.
Because the good news is these are repairable issues! And rent to own affords you the time to repair these issues all the while living in your own home.
And you won't be charged exorbitant interest rates.
AND we take care of putting together your plan so that you can focus on executing!
So how does Rent To Own work?
Step 1: Get Pre-Qualified
Once you find a Rent to Own Company that appeals to you, they will ask you for a bunch of information just like the bank did.
Income, expenses, assets, liabilities, job status, credit report, etc. If you already did this with the bank then this step should be easy-peasy!
Next they will review your documents. And the good news is their qualification requirements are more lenient and focused on annual household income and down payment rather than credit score, ratios and employment status.
Step 2: Customized Plan
Assuming you meet their minimum requirements, they will put together a plan tailored to your situation.
This plan will outline exactly what you need to do to repair the issues that prevented you from getting a mortgage with the bank in the first place.
The whole purpose of the plan is to get you to a place where the bank WILL approve you for a mortgage.
But this can take time, a few years even, so what happens in the meantime?
Step 3: Legal Agreements
There are typically two essential legal documents that need to be signed:
1. The Lease
2. Option to Purchase
These are standard and a normal part of the process. They outline the agreed upon terms that will allow you to rent the home for the first couple of years, and later purchase the home at a pre-determined date and price.
These agreements are intended to protect both yourself and the Rent to Own Company who will ultimately be taking on the risk of purchasing a home on your behalf. An upstanding Rent to Own Company will recommend you have your own lawyer review the legal agreements so that you can be sure you aren't being taken advantage of.
Step 4: Go House Hunting!
The great news is that you will be able to go house hunting with a realtor and choose a house that you'd love to call home.
The Rent to Own Company will purchase the home on your behalf. You will move into the home and pay Rent plus something called an Option Consideration (blog post to come!), which gives you the opportunity to purchase the home at a later date.
On the closing date, you will move into the home. You can paint, hang pictures, and even renovate the home (some limitations may apply). You can bring your pets and your kids (hehe) too.
Basically, you can live in the home as if you owned it, since the goal is for you to purchase the home in the future, you can start living in it like you own it today!
Step 5: Follow Your Plan
While living in the home, you will follow the plan put that was put together for you.
Step by step you will make improvements to your financial situation to become more appealing to the bank.
Remember, the exact steps you take will be dependent on your specific situation and will be provided to you by the Rent to Own Company.
It is essential that these steps be followed and a good Rent to Own Company will check in with you regularly to ensure such is happening.
Step 6: Take Ownership of the Home
After you have repaired whatever issues were in the way of you obtaining a mortgage initially, you will be able to take ownership of the home.
Essentially what this means is you will go to the bank and get a mortgage, thereby purchasing the home from the Rent to Own Company. There will be no price negotiation at this time because the price was determined at the very beginning. This is typically a huge benefit to you as home prices typically go up much more than the price you will be purchasing the home for.
This piece of the process is all paperwork. Then you officially take ownership.
No packing and no moving because you are already living in your home!
It does take work, but it's a great option
While Rent to Own isn't an overnight solution, it certainly is a tried and true way to become a homeowner. There are many benefits to using a rent to own strategy rather than waiting on the sidelines and I will outline the benefits in a future post.
Until then, I'd love to hear your thoughts or answer any questions you might have about the Rent to Own strategy. Leave a comment below.
And don't forget, if you want to learn more about Rent to Own, subscribe to our newsletter to get notified when new blog posts are published.
Happy House Hunting!
Victoria
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