This is the somewhat surprising headline to an item in Fortune yesterday: The Average American Still Can’t Get a Mortgage. The US economy may be on the upswing, the author says, but the average American’s chances of getting a mortgage are not. Chris Matthews based this conclusion on a couple of facts. First, the volume of new mortgages approved in the second quarter declined by $39 billion from a year ago. Second, and “worse” in his view, the median credit score (FICO) for new mortgage applicants stood at 756, an all-time high. From FICO’s point of view, this higher average score indicates that Americans’ credit scores are improving, a good thing. From the average American’s point of view, however, it means a greater likelihood of being rejected by the traditional lenders. It is theoretically possible to get a mortgage in the US with a score as low as 500, but doing so is difficult.

The situation is similar in Canada. In its annual report for 2015, Canada Mortgage and Housing Corporation boasts about the high quality of its mortgage loan insurance portfolio, noting that the average credit score across the portfolio was 761. This is an example of how CMHC is pursuing its strategy of risk management, a strategy that included increasing minimum down payment requirements and increasing mortgage loan insurance premiums for homebuyers with less than 10 per cent down payment. The tighter they make the requirements for qualifying for a mortgage, the higher will be the performance of the portfolio.

The question is, where does this leave those who do not have such stellar credit ratings? According to one mortgage company that specializes in higher-risk customers, more people are denied mortgages by the banks than are approved. Canadian Mortgage Services says that the main reason for mortgage rejection is poor credit. Some would-be borrowers are simply not qualified; they have a poor credit history and mountains of debt. On the other hand, it’s possible to damage one’s credit score through no fault of one’s own—the loss of a job, a death, a sudden illness—but the banks typically don’t take such extenuating circumstances into account, looking only at the numbers. A score is a score.

Clearly, with home sales in Canada setting new records by the month, people are finding the mortgages they need, whether with the traditional lenders, the big banks, or elsewhere. In order to qualify for mortgage loan insurance, CMHC sets out certain general requirements, including the amount of down payment required and the total allowable debt load as a percentage of gross household income. These requirements apply only to homebuyers who have less than 20 per cent of the purchase price as a down payment. Borrowers who meet the requirements will be eligible for the best available interest rates offered by the banks. Those who do not will likely pay a premium, depending on where they find a willing lender. Generally, the higher the applicant’s credit score, the lower the interest rate he will qualify for.

When it comes to mortgage lenders, bigger is not always better. I think a lot of home buyers flock to Wells Fargo and Bank of America, just because they know the names . . . The big banks might work for some borrowers. But it didn’t work for us.  We put a lot into the process, but got nothing out of it.  Working with a smaller lender was a totally different experience for us. The process was smoother and easier. There weren’t as many hoops to jump through. And, most importantly, we finally got approved for the loan.

Many options for borrowers outside the top-tier banks

Industry experts stress that being turned down for a mortgage by a top-tier bank is not the end of the world. There are many options available, among which are a range of other perfectly legitimate lenders, such as co-ops, credit unions, trust companies and private lenders. Private lenders, it is often said, don’t care as much about credit scores and other troublesome details. Private-lender deals tend to close faster as well. For these benefits the borrower can expect to pay a significantly higher interest rate. The terms of a private-lender mortgage, such as pre-payment privileges, may not be overly favourable to the borrower.

Applicants who have been turned down can always appeal the bank’s decision, having found out exactly what was lacking in the original application and taken steps to correct it, though this could take more time than one would want, especially if the problem was weak credit.

Home buyers are also advised to shop around when they need a mortgage, or use a mortgage broker to do that for them. In some cases, it may be necessary to find a guarantor, someone who will co-sign for the mortgage and assume responsibility for the payments if the applicant can’t keep up.

Another option, perhaps less palatable for some, is simply to cut back the mortgage applied for. In other words, forget about the dream home for the time being and buy less.

A writer for the US advocacy group the Home Buying Institute described in harrowing detail the experience of being turned down for a mortgage by the Bank of America. He had an “excellent” credit score, had had two previous mortgages with spotless payment records, and had satisfied all the bank’s numerous requirements, he thought. Yet he was turned down at the last minute for failing on the little-known cash-reserve requirement. The Bank of America, it turned out, required borrowers to have enough cash reserves on hand to cover mortgage payments for six months, something the writer claims he was not informed of until the very end of the application process. It had taken almost two difficult months, and he had nothing to show for it. Happily, he was able to get the mortgage he needed from a different lender in just eleven days.

Plenty of Options for Mortgage Seekers Turned Down by Big Banks by Josephine Nolan | Condo.ca