10 Tips To Get Approved For A Mortgage

Your lender will look at your credit score to determine whether you’re a good candidate for a mortgage. Your three-digit credit score (between 300 and 900) provides a snapshot of your ability to manage debt. While lenders each have their own benchmarks for the minimum credit score required, 660 is typically considered a “good” score. (The CMHC uses 600 as the lower limit for an insured or high-ratio mortgage, meaning a mortgage with less than a 20% down payment.)

You can request your credit score from one of Canada’s two credit bureaus, TransUnion or Equifax. If you discover any errors in your report, or if you find out that your credit score is lower than you expected due to a few missed payments or too many credit applications in a short period of time, don’t panic. You can take steps to repair your credit score before applying for a mortgage, such as:

• Pay down some debt to improve your credit utilization (the amount you’re using) to under 30% of the amount available.
• Ensure you make your payments on time and if possible, make more than the minimum payment.
• Stay under your credit limit as going over can negatively affect your score.
• Don’t close any older credit cards as length of credit history is an important part of your score.
• Diversify your credit mix with a credit card and line of credit, for example, rather than four credit cards.
• Limit the number of hard inquiries on your credit report as it can signal you’re applying for too much credit.

While your credit score may change in as little as 30 to 45 days, it can take months or years to improve a bad credit score. However, having a great credit score is the first step towards securing a mortgage. You’ll also qualify for a better interest rate on your mortgage.

The minimum down payment required is based on the purchase price of the house:

So if you want to purchase a home for $650,000, you will need to pay 5% on the first $500,000 ($25,000) and 10% on the remaining $150,000 ($15,000). That’s a down payment of $40,000 in total.

Your down payment must come from one of three sources:

• Proceeds from the sale of your home
• Self-funded from your savings, a withdrawal from your RRSP (via the Home Buyers’ Plan), a sale of investments or a loan against a secured asset, such as a HELOC (home equity line of credit)
• A non-repayable gift from an immediate family member

While the down payment can be one of the biggest hurdles when buying a home, especially for first-time home buyers, saving for a larger down payment has significant benefits:

• You’ll need to borrow less from your lender, which may make it easier to qualify for a mortgage.
• Your monthly mortgage payments will be lower.
• You’ll pay less in interest over the lifetime of your mortgage.
• If your down payment is greater than 20% of the purchase price, you won’t need mortgage loan insurance.

Related: First-Time Home Buyer’s Guide: 10 Steps For Buying Your First Home

If you’re thinking about quitting your job, starting a new business or going freelance, you might want to consider waiting until after your mortgage has been approved.

Lenders want to see a consistent source of income as well as stable employment to demonstrate you can continue earning over the course of the mortgage. If you have a history of bouncing around from job to job or periods of time without a steady income, your lender will most likely question your reliability at being able to pay the mortgage.

Typically, you’ll need to provide details about your last two years of employment. Substantiating your income is fairly straightforward if you’re a salaried employee as you can use your pay stubs, direct deposits or T4s to confirm your salary. If you work hourly, or receive commissions or bonuses as part of your income, you’ll need to provide at least the last two years of Notice of Assessments. And if you run your own business, you’ll likely need to provide financial statements as well.

Lenders use two ratios to assess your ability to afford a home:

Your Gross Debt Service ratio (GDS) is the percentage of your monthly income that goes toward housing costs. Target: 39% or less.

Your Total Debt Service ratio (TDS) is the percentage of your monthly income that goes toward housing costs and other debts. Target: 44% or less.

Other debts include credit card payments, personal loans, student loans or car loans. If you’re thinking about buying a house, it’s wise to not make any big purchases that would add to your debt load. And if you currently have a mortgage preapproval, you definitely don’t want to take on any additional debt, as the preapproval is conditional upon the amount of debt you had at the time of the application.

While it’s important to not take on additional debt, it’s equally important to pay down the debt you already have. The amount of debt you’re carrying affects your ability to get a mortgage in two key ways:

Your credit utilization: This is a ratio of how much debt you’re using divided by the total credit available to you. It’s recommended that you keep your credit utilization below 30%. For example, if you have a credit card with a $10,000 limit and you’re carrying a $3,000 balance, you’re using 30% of your available credit. But if you also have a line of credit with a $10,000 limit and you’re carrying a $8,000 balance, your credit utilization for that account is 80%, and on average across both accounts is 55%. By paying down your outstanding balances, you’re showing you can manage your debt while at the same time improving your credit score.

Your debt-to-income ratio: As noted above, lenders look at your ability to service your existing debt based on your current income. As you pay down your debt, your TDS will drop, which makes for a stronger application.

While lenders like to see a diverse credit history, meaning you are managing various kinds of debt, certain types of debt are considered riskier by lenders and should be paid down first. For example:

• Back taxes or any outstanding payments to the Canada Revenue Agency
• Unsecured credit cards
• Unsecured credit lines

While the housing market shows signs of cooling, housing prices are still 38% higher across Canada than they were before the pandemic, according to Canadian Mortgage Trends. Canadians across the country have been struggling with the high cost of housing. This raises questions around affordability.

Since 2016, to qualify for a mortgage at a bank, you’ll need to pass a “stress test” that proves you’re able to afford payments at a qualifying interest rate that is typically higher than the actual rate in your loan documents. This protects you (and your lender) from rising interest rates.

Your bank will use the higher interest rate of either:

• 5.25% or
• The interest rate negotiated with your lender, plus 2%

Therefore, if you qualify for a mortgage at a 6.20% interest rate, you’ll need to prove you can carry the mortgage payments at 8.2%.

(Credit unions and other alternatives, such as private mortgage lenders, that are not federally regulated do not need to use the mortgage stress test.)

However, this shouldn’t be your only metric of whether or not you can afford a mortgage. Your lender will look at factors such as your credit score, income and debt to determine what size of mortgage you will qualify for. But there are expenses that aren’t included on a mortgage application that may impact your ability to carry that debt, such as RRSP contributions or child care. Put differently: just because you are approved for a $600,000 mortgage (or you think you might be based on a pre-qualification), it doesn’t mean that should be your upper limit.

It’s important to be honest with yourself about how much you can afford to pay for your mortgage without negatively impacting your lifestyle and future financial goals. If you’re able to be more conservative with your mortgage request, and have the financial stability to back it, you’re more likely to be approved. This might mean looking at smaller, less expensive homes, or properties in more affordable neighbourhoods.

While your bank might be your obvious first choice for a mortgage, the market is competitive and it’s important to consider all your options to get the best rate. With so many lenders on the market, it can be difficult to know where to begin. The following institutions offer mortgages:

• Banks
• Trust companies
• Online banks
• Credit unions and caisse populaires
• Private lenders

Keep in mind that each lender will have its own qualification standards, so while you might get turned down for a mortgage with a Big Six Bank, your local credit union may be willing to work with you. In other words, just because one lender says no, another might say yes.

A mortgage broker can help you compare mortgage products and rates to help you find the best options for your goals.

Related: Best Mortgage Lenders in Canada

If you’re concerned you might not qualify for a mortgage due to being a freelancer or a rocky credit history, for example, but you’re confident you can carry your payments responsibly, adding a guarantor or a co-signer to your mortgage will make it a stronger application. That’s because your lender will consider their income, employment and credit score when evaluating your application. But before asking for help (usually from a family member), it’s important to understand the different risks and responsibilities of these roles:

A guarantor is added to the mortgage but not the property’s title. The guarantor will be liable for paying the mortgage only if you default on the loan.

A co-signer is added to both the mortgage and the property’s title. The co-signer is liable for paying the mortgage if any installments are missed and assumes part ownership of the debt, meaning the mortgage will appear on the co-signer’s credit history. Missed payments will also impact the co-signer’s credit score. In the case of default, the lender may come after the co-signer for payment. The co-signer must sign all the mortgage papers.

Your lender will have its own guidelines regarding adding a guarantor or co-signer.

You’ve likely heard that it’s a good idea to get a mortgage preapproval before you start looking for a house so you know what you can afford. A mortgage preapproval verifies how much a lender is willing to lend you considering factors such as your income, down payment, debt level, assets and credit score.

However, a preapproval is also important because during the application process a lender will signal if there are any potential issues with your finances or eligibility that might hinder your mortgage application. For example, if your credit score is too low at the preapproval stage, you can take some time to improve it before you’re ready to apply for your mortgage.

What’s more, according to the CMHC, the most common delay in getting approved for a mortgage is missing or incomplete information. While a preapproval seems like a lot of work upfront, you’ll be better equipped when it comes time to apply for your mortgage.

While a preappproval is not a guarantee that you’ll get a mortgage, it is a critical step to ensuring your application goes smoothly.

Related: How to Get a Mortgage Preapproval

According to the CMHC, the most common delay in getting approved for a mortgage is missing or incomplete information. Buying a home, whether you’re applying for a preappoval or your mortgage loan, requires a lot of paperwork. 

Your lender will tell you exactly what is required, but the earlier you start getting organized, the faster your application can be processed. Required documents may include:

• Bank account statements
• Pay stubs or direct deposits
• Proof of other income, such as rental income or pension
• Employment letter
• Gift letter, if any of the down payment is coming from a relative
• Letter from your landlord (if you’re renting) confirming your rent history
• Tax records, including T4s and Notice of Assessments
• Loan statements, including lines of credit, personal loans, auto loan or credit card
• Investment statements, including non-registered accounts, RRSPs or TFSA
• Other financial obligations, such as alimony or child support
• Real estate listing of the property
• Mortgage preapproval letter
• Purchase and Sale agreement (and associated documents)
• Home appraisal report (if you hired your own appraiser)
• Current property tax statements
• Property heating costs
• Condominium fees

You will either need to submit hard copies or digital copies to your lender. 

While this step might seem like a lot of work upfront, you’ll be better equipped when it comes time to apply for your mortgage.

Applying for a mortgage is stressful, especially if you’ve already made an offer on your dream home. By following these tips, you’ll not only strengthen your application (making it more likely that you’ll get approved) but you’ll improve your financial situation in the long run.