Getting approved for a mortgage is a significant milestone on the path to homeownership. Understanding what lenders look for can help you prepare and improve your chances of securing a mortgage with favorable terms. Here’s a comprehensive guide to the key factors that influence mortgage approval in Canada.
1. Income and Employment History: Stability Matters
Lenders will scrutinize your income and employment history to ensure you can afford the mortgage payments. A stable employment history with a steady income is favorable. If you’re self-employed, be prepared to provide additional documentation to prove your income stability.
2. Debt Servicing Ratios: GDS and TDS Explained
Gross Debt Servicing (GDS): This ratio compares your housing costs (mortgage payments, property taxes, heating costs, and 50% of condo fees, if applicable) to your gross monthly income. Ideally, your GDS ratio should be 39% or less.
Total Debt Servicing (TDS): This ratio includes all your monthly debt obligations (housing costs, car payments, credit card payments, loans, etc.) compared to your gross monthly income. Lenders typically prefer a TDS ratio of 44% or less.
By assessing both GDS and TDS ratios, lenders get a comprehensive view of your financial health and ability to manage additional debt.
Disclaimer: While these are the ideal ratios, there are alternative solutions available if your ratios are higher. Reach out to me, and we can do our best to find a solution that works for your unique financial situation.
3. Credit Score: Your Financial Report Card
Your credit score is one of the most crucial elements in the mortgage approval process. It reflects your creditworthiness and is a major determinant of the interest rate you’ll be offered. Generally, a higher credit score leads to better mortgage rates and terms. Aim to maintain a healthy credit score by paying your bills on time, keeping your credit card balances low, and avoiding excessive new credit applications.
4. Down Payment: The Larger, the Better
The minimum down payment in Canada varies based on the purchase price of the home:
– 5% for homes up to $500,000
– 10% for the portion of the home price between $500,000 and $999,999
– 20% for homes priced at $1,000,000 or more
A larger down payment can improve your approval chances and reduce your mortgage insurance premiums.
5. Property Appraisal: Ensuring Value
An appraisal ensures that the property’s value aligns with the purchase price. Most lenders require a property appraisal to confirm that the property is worth the amount you’re borrowing.
6. Mortgage Stress Test: Can You Handle Higher Rates?
The mortgage stress test ensures you can afford payments at a higher interest rate. It uses the Bank of Canada’s qualifying rate or your contract rate plus 2%, whichever is higher. This helps safeguard against future interest rate increases.
7. Documentation: Be Prepared
Prepare to provide various documents, including:
– Proof of income (pay stubs, employment letters)
– Proof of down payment (bank statements, gift letters)
– Credit history (credit report)
– Identification (ID, SIN number)
– Details of current debts (loan statements, credit card statements)
Having these documents ready can expedite the approval process.
8. Financial History: Clean Slate
Lenders may review your financial history for bankruptcies or other financial red flags. A clean financial history boosts your approval chances.
9. Other Considerations: Co-signer and Pre-approval
– Co-signer: If you have a low credit score or insufficient income, a co-signer might help with approval.
– Pre-approval: Getting pre-approved helps you understand how much you can afford and shows sellers you’re a serious buyer.
Understanding these aspects and preparing accordingly can significantly improve your chances of getting approved for a mortgage in Canada. By maintaining a healthy credit score, ensuring stable income, managing your debts, and saving diligently, you can navigate the mortgage approval process with confidence and ease. Ready to take the next step towards homeownership? Start preparing today!
For personalized mortgage advice or to discuss your options, feel free to reach out to me. Let’s make your dream home a reality!
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