Are you in the exciting phase of house hunting? We are here to elevate your home-buying experience with our seamless pre-approval process.
In this comprehensive guide, we will discuss the intricacies of mortgage pre-approval, highlighting the requirements of the Mortgage approval process.
Requirements for Mortgage Approval in Canada
When you are ready to purchase a house, we simplify the full mortgage approval process.
Understanding the six factors lenders use to qualify you for a mortgage is crucial.
1. Size of Your Down Payment
Your down payment size affects your mortgage approval. Mortgage experts guide you through the implications of your down payment on your mortgage.
The required down payment may be higher based on the home price. For instance, a property valued at $1 million or more will necessitate a minimum down payment of 20%.
If your down payment is less than 20% for a home purchase, you’ll need a high-ratio mortgage, which is covered by default insurance.
Qualification requirements for a conventional mortgage (20% or more down payment) can vary depending on your situation.
A higher down payment reduces the lender’s risk in the mortgage loan amount. Some lenders may modify or waive certain qualifications with a higher down payment, such as for business owners or those with less-than-stellar credit.
2. Your Income
Lenders evaluate how much of your income will be allocated to housing expenses. Mortgage experts will help you assess your income about potential new home expenses.
A lender assesses the proportion of your total income allocated to housing expenses to determine your comfortable affordability.
If your house payment constitutes a larger share of your income, it may pose challenges in meeting other potential expenses like cars, furniture, and home maintenance.
Conversely, if the house payment represents a smaller portion of your income, it suggests a better ability to sustain the property in the long term.
During the mortgage application, the lender scrutinizes your ‘gross income,’ encompassing earnings before taxes, including overtime, commissions, dividends, and other sources.
A stable history of income sources, even from part-time or seasonal jobs held for at least two years, is favorable.
The lender also compares your existing housing costs with anticipated new home expenses, with a smaller increase strengthening your application.
3. Your Debts
Gross Debt Service (GDS) and Total Debt Service (TDS) ratios play a crucial role in determining your ability to afford mortgage payments. Our affordability calculator provides insights into managing your debts.
In evaluating your eligibility for a mortgage, the lender considers not only your income but also your outstanding debts.
To gauge your ability to afford mortgage payments, they employ the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.
Our affordability calculator can provide an estimate. Your debts encompass various obligations, including your house payment and other monthly commitments such as loans for cars, credit lines, charge cards, and child support.
To calculate your debt ratios for mortgage qualification in Canada:
- GDS should amount to approximately 39% of your monthly household income. Sum up mortgage payments (principal plus interest), taxes, heating expenses, and half of monthly condominium fees if applicable. Then divide by your gross monthly household income.
- TDS should not surpass 44% of your monthly household income. Combine housing costs with additional debts like car payments, personal loans, and credit card payments. Divide the total by your gross monthly household income.
4. Your Employment History
A steady employment history enhances your mortgage eligibility. We guide you in presenting a strong employment profile to lenders.
Securing a mortgage doesn’t require wealth, but a consistent employment history enhances eligibility. Lenders favor individuals with years of experience in the same job or field.
Yet, a shorter tenure at your current job doesn’t necessarily hinder loan approval, provided you’ve maintained regular income over the past year.
5. Your Credit History
Good credit is paramount. We explain the significance of your credit score and offer advice on maintaining a favorable credit standing.
Having good credit significantly influences mortgage qualification. Banks assess not only your financial capacity, gauged by income versus debts but also your creditworthiness, determined by your credit score—an indicator of your repayment history.
To stay informed, it’s advisable to obtain your credit report beforehand, allowing you to identify and rectify errors.
When applying for a mortgage, the lender automatically obtains your credit report. If you lack a loan or credit card history, they scrutinize your payment record for utility bills and rent.
A proactive approach to understanding and managing your credit enhances your chances of securing a favorable mortgage.
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6. The Property’s Value
Ensuring the property’s value aligns with the purchase price is vital. Our professionals emphasize the importance of a professional appraisal for your protection.
When making a home selection, the lender aims to verify the property’s value aligns with your proposed purchase price, as the approved loan amount is contingent on this valuation.
The property’s assessed worth serves as the lender’s primary reassurance, ensuring they can recoup the funds in the event of missed mortgage payments, through a procedure known as ‘foreclosure.’
Securing a professional appraisal for the intended home purchase is of paramount importance, not only to gain insight into the property’s value but also to safeguard your interests and provide a protective measure in the home-buying process.