Why Your Commercial Mortgage Was Declined (Real Reasons from Underwriters)

# Why Your Commercial Mortgage Was Declined (Real Reasons from Underwriters)

Getting a commercial mortgage declined is frustrating - especially when the lender gives you a vague reason like "doesn't meet our lending criteria." After two decades in commercial mortgage brokering, we've seen every possible decline reason. Here are the real ones - and what you can do about each.

1. DSCR Below Lender Thresholds

This is the number one reason commercial mortgages are declined. The property simply doesn't generate enough income to service the proposed debt with an adequate margin of safety.

Typical minimum DSCR requirements:

Source: OSFI, Guideline B-20 and Commercial Lending Expectations, 2023

Source: CMHC, Multi-Unit Mortgage Loan Insurance Underwriting Guidelines, 2024

How to fix it:

• Increase NOI by raising rents to market levels
• Reduce operating expenses through efficiency improvements
• Request a longer amortization (30 or 35 years instead of 25) to reduce annual debt service
• Reduce the loan amount (increase your down payment)
• Explore CMHC insurance for qualifying multi-family properties (1.10x threshold)

Read our detailed guide on how to optimise your DSCR legally.

2. Weak Tenant Mix or Short Lease Terms

Lenders don't just look at total rental income - they evaluate the quality and durability of that income. A property generating $200,000 in annual rent from five national-chain tenants on 10-year NNN leases is dramatically different from one generating the same amount from eight small businesses on month-to-month agreements.

Red flags that trigger declines:

• Single tenant concentration: One tenant representing more than 40–50% of total rental income
• Short lease terms: Majority of leases expiring within 12–18 months
• No escalation clauses: Flat rents with no annual increases
• Weak tenant credit: Tenants with no established business credit history
• Above-market rents: If current rents are significantly above market, lenders will underwrite to market rates

Source: CMHC, Rental Market Survey, 2024

How to fix it:

• Sign longer-term leases before applying (3–5 year minimum)
• Negotiate rent escalation clauses (2–3% annual or CPI-linked)
• Diversify your tenant base - no single tenant above 35% of revenue
• Obtain tenant financial statements or credit reports
• If rents are above market, be prepared with market comparables justifying your rates

3. Property Condition Issues

Banks aren't in the business of financing problem buildings. If the property has deferred maintenance, structural issues, or systems at end-of-life, the lender may decline or require escrow holdbacks.

Common property condition issues that cause declines:

• Roof nearing end of useful life (25+ years old)
• Outdated or failing HVAC systems
• Asbestos, mould, or other hazardous materials
• Foundation or structural concerns
• Non-compliant electrical or plumbing
• Failed fire safety systems
• Significant deferred maintenance backlog

How to fix it:

• Obtain a Building Condition Assessment (BCA) before applying
• Address critical items (roof, HVAC, fire safety) before seeking financing
• Propose an escrow holdback arrangement: the lender holds back funds from the mortgage advance, releasing them as repairs are completed
• For significant renovation requirements, consider a private bridge loan to acquire and renovate before seeking permanent bank financing

4. Environmental Concerns (Phase I / Phase II ESA)

Environmental contamination is one of the few issues that can kill a deal with no fix. Under Canadian environmental law, property owners can be held liable for contamination regardless of whether they caused it.

Source: Canadian Environmental Protection Act, 1999 (CEPA 1999)

Common triggers:

• Property history includes gas station, dry cleaner, auto repair, or industrial use
• Adjacent properties with contamination (migration risk)
• Underground storage tanks (current or removed)
• Fill material of unknown origin
• Phase I ESA recommends a Phase II investigation

If the Phase II reveals contamination above provincial standards, the lender will almost certainly decline. Remediation must be completed, and a certificate of property use obtained, before financing can proceed.

How to fix it:

• Always conduct a Phase I ESA early in the due diligence process
• If Phase II is recommended, complete it before submitting your mortgage application
• If contamination is found, obtain remediation cost estimates and factor them into your purchase negotiation
• Some properties may qualify for provincial brownfield programs that provide financial incentives for cleanup
• If the property is fundamentally sound but needs environmental work, a private lender may fund the acquisition while remediation is underway

5. Personal Credit Issues

While commercial mortgages focus primarily on the property's income, lenders still evaluate the borrower's personal credit and financial history.

Credit issues that cause declines:

Source: Equifax Canada, Credit Score Ranges and Factors, 2024

How to fix it:

• Pull your own credit report and address errors before applying
• Pay down high-balance credit cards and lines of credit
• Resolve any CRA tax arrears or establish a payment plan
• If your personal credit is weak but the property is strong, consider:
• A co-signer or guarantor with strong credit
• A private lender who focuses on property fundamentals over personal credit
• A credit union that takes a more holistic view

6. Insufficient Equity

Most conventional commercial lenders cap their loan-to-value (LTV) at 65–75%. If the appraised value comes in lower than the purchase price - or if the lender applies a more conservative valuation - you may not have enough equity.

Common equity shortfall scenarios:

• Appraisal comes in below purchase price (gap financing needed)
• Lender applies a lower cap rate than market, reducing appraised value
• Lender uses "as-is" value rather than "stabilised" value for value-add properties
• Down payment source cannot be verified or documented

How to fix it:

• Negotiate a price reduction based on the appraisal
• Bring additional equity from savings, investments, or partner capital
• Structure a vendor take-back mortgage to bridge the equity gap
• Consider a different lender with higher LTV tolerance
• For value-add properties, use private financing based on after-renovation value

7. Wrong Lender for the Property Type

This is more common than you'd think. Different lenders specialise in different property types, and sending a deal to the wrong lender is a guaranteed decline.

Source: CBA (Canadian Bankers Association), Commercial Lending Overview, 2024

How to fix it:

This is where a commercial mortgage broker earns their fee. The right broker knows which lenders are active in which property types and can match your deal to the right capital source. Contact The Mortgage World to ensure your application reaches the right desk.

8. Incomplete or Poorly Presented Application

You'd be surprised how many commercial mortgage applications are declined simply because the package was incomplete, disorganised, or unconvincing.

A complete commercial mortgage application should include:

• Executive summary of the deal
• Personal net worth statement
• 2–3 years of property operating statements (T1 General, T776)
• Current rent roll with lease expiry dates
• Copies of all leases
• Property tax assessment
• Phase I ESA (or commitment to order)
• Building condition report or inspection
• Business plan (for owner-occupied or value-add properties)
• Source of down payment documentation

How to fix it:

• Prepare a professional, well-organised application package
• Include an executive summary that tells the story of the deal
• Anticipate lender questions and address them proactively
• Work with a commercial mortgage broker who knows what each lender expects

The Bottom Line

A commercial mortgage decline isn't the end of the road - it's a diagnostic. Every decline has a specific cause, and almost every cause has a solution. The key is understanding why you were declined and addressing the root issue before reapplying.

If your commercial mortgage was recently declined, don't simply apply at another bank with the same package. Diagnose the problem, fix it, and then target the right lender for your specific situation.

For deals that don't fit conventional bank criteria today, private financing can serve as a bridge while you address the underlying issues. Contact our team for a no-obligation review of your declined application.

References

• OSFI Guideline B-20: https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/residential-mortgage-underwriting-practices-procedures
• CMHC Multi-Unit Insurance Underwriting: https://www.cmhc-schl.gc.ca/professionals/project-funding-and-mortgage-financing/mortgage-loan-insurance/multi-unit-insurance
• Canadian Environmental Protection Act: https://laws-lois.justice.gc.ca/eng/acts/c-15.31/
• Equifax Canada: https://www.consumer.equifax.ca/personal/
• CMHC Rental Market Survey: https://www.cmhc-schl.gc.ca/professionals/housing-markets-data-and-research/market-reports/rental-market-reports-major-centres
• CBA Commercial Lending: https://cba.ca/commercial-lending