A home purchase typically entails getting a mortgage to help you pay for it. After all, the cost of a home is usually much more than the average Canadian is able to cover in an all-cash transaction.
But in order to get a mortgage, you’ll need to find a mortgage lender who is willing to loan you these funds. And in order to be eligible for a mortgage, there are certain requirements you’ll need to meet.
Read on to find out what it takes to get approved for a mortgage in Canada and what you need to do when dealing with a lender.
As you would imagine, mortgage lenders don’t just hand out hundreds of thousands of dollars to just anyone. Instead, they require that applicants meet certain criteria before a loan is approved. Lenders will look at several aspects of your financial health before your application for a mortgage goes through.
Here are the requirements that Canadians need to meet in order to secure a mortgage in Canada:
One of the more important components of your financial health in terms of securing a loan is your credit score. In Canada, credit scores range from 300 to 900, and lenders generally accept a minimum credit score of anywhere between 650 and 680.
Obviously, your income will need to be adequate enough to cover the mortgage payments every month. In addition to all of your other bills that you’re responsible for paying, your lender will assess your income relative to all the debts you have to pay. More specifically, they’ll look at your debt-to-income ratio, which measures how much of your gross monthly income is dedicated to paying off debt. The lower this percentage, the better.
If your debt load is already sky-high, it may be more difficult for you to be able to comfortably cover an additional debt payment in the form of a mortgage. In this case, you may need to take some time to reduce your debt before you apply for a mortgage.
To secure a conventional mortgage, you need to come up with a down payment that goes towards the home’s purchase price. The higher the down payment, the lower your overall loan amount will be, which will also reduce our loan-to-value ratio, which is a measure of the loan amount you have relative to the value of the property. Different lenders may require different down payment amounts, and your financial profile will also dictate how much you need to put down. But generally speaking, 5% of the purchase price of the home is the minimum.
As already mentioned, you need to come up with a down payment in order to secure a mortgage, and 5% of the purchase price of the home is typically the minimum amount required. But if you want to avoid paying mortgage default insurance (which protects the lender in case you default on your loan), you’ll need to come up with at least a 20% down payment. Anything less than a 20% down payment will automatically require the additional payment of mortgage default insurance.
The amount that needs to be paid for this insurance policy is based on a percentage of the price of the home. Generally speaking, mortgage default insurance costs anywhere between 2.80% – 4.00% of the purchase price of the home and is typically rolled into mortgage payments. Even though it may be an added expense, it allows Canadians to enter the real estate market who might not otherwise be capable of doing so without it.
Whether you choose to work with a bank or a mortgage broker, there are benefits and drawbacks to both.
Many homebuyers default to the bank that they deal with for day-to-day banking when it comes time to apply for a mortgage. And while that may be fine, it’s important to understand that banks are only able to offer their clients their own mortgage products. They’re essentially limited to what they can offer, which in turn limits what borrowers can access.
Working with a mortgage broker is a little different. Rather than representing just one financial institution, mortgage brokers work with a myriad of lenders in their network. A mortgage broker works as an intermediary who negotiates with several lenders on your behalf to find the right one who is best suited for you.
Rather than you going out and comparison shopping with different lenders, your mortgage broker will do all the legwork for you. You’ll fill out one application form and they will approach different lenders to see what each is willing to offer you before settling on one. Mortgage brokers are typically paid a referral fee by the lenders, so you never actually see a bill for their services.
When shopping for a mortgage, you have options when it comes to your commitment to a specific interest rate.
You’ll have the option to choose between a fixed-rate or variable-rate mortgage. As the names suggest, a fixed-rate mortgage comes with an interest rate that does not change throughout the mortgage term, while a variable-rate mortgage comes with a rate that fluctuates at specific intervals throughout the term.
Mortgages have many variables to them, and payment frequency is one of them. Mortgages must be repaid in installment payments over a period of time. You’ll be given a specific amount of time to repay the loan amount in full, and each payment you make will go towards achieving this goal.
But you have options as far as how frequently you’ll be paying out mortgage payments, including the following:
You may even want to consider paying off your mortgage early, but there are many factors to consider so makes sure you speak with your mortgage expert first.
Before you get the keys to your new home, there are a few closing costs that you’ll need to cover in addition to your mortgage payments, which can include any one of the following:
You have the option to go with a short-term or long-term amortization period, which is the total amount of time that you have to pay off your loan in full. Both have their pros and cons.
With a short-term amortization period, like 15 years, you’ll be able to pay off a loan amount sooner, which means you can be debt-free sooner. This also means you’ll save a great deal of money on interest paid. But that also means that your monthly mortgage payments will be a lot higher to achieve this goal.
With a long-term amortization period, like 25 years, you’ll have the advantage of lower monthly mortgage payments, which can make the mortgage more affordable. But the downside is that you’ll be paying a lot more in interest over the life of the loan, and you’ll be stuck with this debt for much longer.
It’s generally recommended that buyers get pre-approved for a mortgage before they start looking for a house. Getting pre-approved has many advantages. It will tell you how much you can afford in a home purchase. That way you can narrow your focus only on properties that are within your budget, saving you time and disappointment.
Being pre-approved will also help you stand out in a competitive market, especially if you find yourself competing in a bidding war. Sellers will tend to look more favourably on buyers who are pre-approved.
Further, pre-approval will help move the initial mortgage approval process along faster once you find a home you love and an offer is reached. Much of the paperwork is already done, and all that is needed at that point is to submit the purchase agreement to the lender for final approval.
Just keep in mind that pre-approvals have an expiry date of between 90 to 120 days. So once that date comes and goes, the pre-approval letter is no longer valid.
Mortgage FAQs
What credit score do I need to get approved to get a mortgage?
As mentioned earlier, a credit score of at least 650 to 680 is needed to secure a mortgage with a conventional lender. If our score is lower than that, you may need to seek out private lenders who work with bad credit borrowers. What’s the difference between a mortgage pre-qualification and a mortgage pre-approval?
Unlike a pre-approval, a pre-qualified mortgage is only an estimate. It uses your basic financial information to provide you with an estimate on how much mortgage you can qualify for and at what rate. A pre-approved mortgage, on the other hand, is a more accurate version of a pre-qualification. It’s based on extensive documentation and the lender will provide you with a written commitment. Moreover, you can lock in the interest rate for up to 120 days with a mortgage pre-approval, whereas a pre-qualification is simply an estimate.What is a mortgage stress test?
The mortgage stress test is a model used to verify whether a borrower can afford the mortgage if rates went up or if they experienced some sort of financial turmoil. To pass the mortgage stress test, borrowers must be able to qualify for their mortgage at a rate of 5.25% or at their contracted mortgage rate plus 2%.
If you’re in the market to buy a home and need a mortgage to help you finance it, you’ll need a mortgage lender. You can submit a request on Loans Canada today and we’ll help connect you to a third-party licensed mortgage broker who can help you.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
An appraisal involves assessing the value of a property based on current market values and is conducted by an appraiser that is typically assigned by a lender. The appraisal is then used by the lender to determine whether or not to extend a mortgage to a borrower. A bridge loan is a type of short-term loan that may be used to “bridge” the gap between carrying a mortgage on an existing home and covering the mortgage for a new home. These are usually obtained when the closing dates of a home sale and purchase overlap, requiring the seller to continue paying the mortgage on the existing home before it closes while paying the mortgage on a new home. A governing body in Canada that oversees and executes several federal housing projects in relation to the National Housing Act. A cash-back mortgage allows borrowers to obtain the mortgage principal and a percentage of the loan amount in cash, which can come in handy to cover the cost of certain expenses, such as making home improvements or paying for car repairs. Rates on these types of mortgages tend to be higher compared to other home loans. A closed mortgage allows borrowers to prepay only a certain amount of the principal without being charged a prepayment penalty fee. Fixed-rate closed mortgage prepayment penalties are usually 3-months’ worth of interest or the interest rate differential, whichever of the two is greater. Before a real estate transaction closes, certain closing costs will need to be paid, which can include real estate commissions, lawyer fees, land transfer taxes, appraisal fees, home inspection fees, adjustments, and others. A conditional offer is not yet final and means that there are certain conditions that must be fulfilled by the buyer, seller, or both before the sale is considered “firm.” For instance, an offer could be conditional on the home being inspected, which the buyer must be satisfied with. A construction mortgage allows borrowers to finance the cost of construction of a new home or major renovations. Your debt ratio determines your ability to pay off a mortgage by measuring your debt relative to your income. Lenders look at debt ratios to assess a borrower’s ability to make mortgage payments. A high debt ratio means your debt load is too high relative to your income. Gross debt service ratio refers to your debt that does not include a mortgage payment, and total debt service ratio refers to your total debt including mortgage payments. A deed is a document signed by the seller that transfers ownership from the seller to the buyer. A down payment is the money that is put toward the purchase price of a home. The required down payment will depend on a number of things, such as the type of mortgage being taken out and the cost of the house. An offer goes “firm” after all conditions have been satisfied and signed off by all parties. A sale can also be immediately firm if no conditions are included. A fixed-rate mortgage means that the interest rate does not change throughout the entire mortgage term. Even if posted interest rates go up or down during the term, your rate will be locked in and stay the same until the term ends. Foreclosure is an unfortunate situation in which a homeowner loses possession of the title of their home as a result of mortgage payment defaults. When mortgage payments are missed, the foreclosure process may begin after a certain number of days have passed. In this case, the lender can take over the home under a “power of sale,” after which the homeowner may still have a chance to make good on their mortgage payments and bring their debt up to par. Otherwise, the lender may make efforts to sell the property to recover any money they are owed. A gross debt service ratio is the measure of housing-related debt relative to a borrower’s income. GDSR is a factor that lenders consider when determining whether or not to approve a mortgage application. A high-ratio mortgage refers to a mortgage in which the principal is greater than 80% of the property’s value. That means more than 80% of the home’s value must be borrowed in order to buy a home, while the down payment is less than 20% of the property value. High-ratio mortgages require mortgage default insurance to be paid. The First-Time Home Buyers’ Plan (HBP) is a government incentive program that allows first-time homebuyers to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) – or $50,000 in total for first-time home buyers and their partner – to buy or build a home. The full amount withdrawn must be repaid within 15 years. The equity in a home represents the value of the property, less total outstanding debt, that the owner actually owns outright. It is calculated by subtracting the total mortgage loan amount still owed by the property’s value. Using the equity in your home, you can secure a line of credit that uses the equity as collateral. The credit limit is usually equivalent to a particular percentage of your home’s value and there is a set date when the loan must be repaid. If you default on this kind of loan, the lender can repossess your home and sell it to cover the owed debt. Since there is a high risk with this type of financing, it is typically used to finance big purchases such as home improvements, education, or medical expenses. Many conditions can be inserted into a purchase agreement, including a home inspection. The home inspection allows buyers some time to have the property assessed by a professional to uncover any potential issues with the home before the buyer is obligated to complete the purchase. Interest is added to the principal amount of the mortgage and is paid to the lender in exchange for access to the funds needed to complete a real estate purchase. Interest is charged from the moment the money is received to the moment the term expires. Land transfer taxes are charged by the province in which the property is being purchased, as well as in certain municipalities. It is a type of tax that is based on the purchase price of the property, though these taxes vary by province. First-time homebuyers are sometimes exempt from paying the entire land transfer tax amount and may be eligible for a rebate. The maturity date is the date when the mortgage term ends. It is at this point that the mortgage must either be paid in full, refinanced, or renewed for a new term. A mortgage is a loan that is provided by a lender to help a homebuyer complete a home purchase. Lenders provide a certain amount of money required to cover the cost of a home’s purchase price while charging interest on the principal amount. The loan is collateralized by the property itself. The mortgage must be repaid according to the terms of the contract. If the loan amount cannot be repaid according to the terms, the lender has the right to repossess the property and sell it to recoup any losses. A mortgage broker is a professional who works on behalf of the borrower and finds the best mortgage product and lender among their network of lenders. Mortgage default insurance is designed to protect the lenders when a borrower is unable or unwilling to repay their mortgage. This is applicable to high-ratio mortgages where the down payment amount is less than 20% of the purchase price of the property and does not apply to conventional mortgages. Borrowers are responsible for this payment. A mortgage discharge is issued by the lender when the mortgage is paid off in full by the borrower. When the mortgage is fully repaid, it is discharged from the title to the property and certifies that the property is completely free from the mortgage debt Mortgage life insurance is an optional policy that borrowers may take out. It is designed to reduce or pay off the mortgage amount (up to a certain amount) in the event of the borrower’s death. A mortgage payment is the regular payment borrowers are required to make to pay off their home loan. These payments can be made monthly, semi-monthly, biweekly, or weekly, and include both principal and interest. A mortgage pre-approval involves having your credit and finances checked out before you formally apply for a mortgage once you agree to purchase a particular home. It allows you to find out how much can be afforded, how much the lender is willing to lend, and the interest rate that may be charged. Pre-approvals expire within 90 to 120 days after they are issued and are not a guarantee of final mortgage approval. The mortgage principal represents the amount of money borrowed from a lender and does not include the interest portion. Lenders typically submit a mortgage statement to borrowers on a yearly basis that details the status of the mortgage, including how much has been paid and the principal on the mortgage that still remains. The mortgagee is a mortgage lender. The mortgagor is the borrower. The Multiple Listing Service (MLS) is a database of listings where real estate professionals market properties they have for sale and search for properties for sale for their clients. The offer represents the purchase agreement that the buyer submits to the seller and that the seller can either accept, reject, or negotiate with the buyer. The offer includes the offer price, deposit amount, closing date, conditions, and other items pertinent to the transaction. An open mortgage allows borrowers to repay their loan amount in part or in full without incurring any prepayment penalty fees. Open mortgages tend to have higher interest rates compared to closed mortgages but are more flexible. The posted rate is the lender’s benchmark advertised interest rate for mortgage products offered. These are not necessarily set in stone, but may be negotiated with the lender. Prepayment is made when some or all of the loan amount is paid off before the end of the mortgage term. Most open mortgages can be paid off early without any prepayment penalty charges, but prepaying a closed mortgage typically comes with a prepayment charge. However, most closed mortgages allow an annual prepayment of anywhere between 10% to 20% without any penalty. When all or part of a closed mortgage is paid off before the end of the mortgage term, a prepayment charge may have to be paid to the lender. The prime rate advertised by a lender is typically based on the Bank of Canada’s interest rate that is set each night, which may change at any time. Property insurance must be paid on a home throughout the mortgage term. Lenders require a policy to be held on a property before they agree to extend a mortgage, and the lender must be named on the policy. This type of insurance covers the cost of any repair or replacement as a result of damage to the home from fire or other disasters. Property taxes are paid by homeowners to their respective municipalities to cover the cost of things such as police, garbage collection, policing, schools, and fire protection. The property tax amount paid is based on the property’s value and the rate charged by the municipality. A qualifying rate is the interest rate that a lender uses to assess a borrower’s eligibility for a mortgage and to calculate your debt-service ratio. When the term of a mortgage expires, another term may be negotiated with the lender. If the mortgage is not renewed, it must be paid off in full. Homeowners over the age of 55 can use a reverse mortgage to borrow as much as 50% of the home’s value to be used to pay for other expenses. Payments are not made on a reverse mortgage, but interest can accrue on the loan amount until the property is sold or until the homeowner passes away. A second mortgage may be taken out on a home that already has a mortgage on it. The funds accessed through a second mortgage from the home’s growing equity may be used to cover other expenses, such as home renovations, but they carry more risk than first mortgages. The statement of adjustments outlines the purchase price, deposit, and any financial adjustments that are required for taxes, utilities, or condo fees that have been prepaid by the seller and payable by the buyer to compensate the seller for fees already covered on the home. A survey is a plan of the property’s lot that shows the lot size and where the property boundaries and building structures lie. It will also show where any easements, right-of-ways, or overhanging structures from adjacent properties that could impact the value of the home. The mortgage term is the period of time that you are committed to your mortgage with your lender, including the interest rate. When the term expires, the mortgage either needs to be paid off in full, refinanced, or renewed, either with the same lender or a new one. The average term is 5 years, though it can range anywhere from 1 to 10 years. Title is the ownership provided to a homeowner when a property is purchased. A clear title is required by lenders before a mortgage is extended. If there are any issues with the property’s title, they must be resolved before the transaction closes. Title insurance is meant to protect lenders and buyers from issues on the title that are discovered after the transaction closes. Title issues can include title fraud, encroachments, municipal work orders, or zoning violations. If title insurance is purchased, it will be added to the closing costs. The total debt service ratio refers to the percentage of gross annual income needed to cover all debts in addition to the mortgage payments (including principal, interest, taxes, utilities, and more). With a variable-rate mortgage, the interest rate will fluctuate based on a financial index. Monthly payments could remain the same, but the amount paid toward interest versus principal could change. If rates increase, more money is paid toward interest, but if rates decrease, more money goes toward the principal. Mortgage Glossary
Terms
Appraisal Bridge Loan Canadian Housing and Mortgage Corporation (CMHC) Cash-Back Mortgage Closed Mortgage Closing Costs Conditional Offer Construction Mortgage Debt Ratio Deed Down Payment Firm Offer Fixed-Rate Mortgage Foreclosure Gross Debt Service Ratio High-Ratio Mortgage Home Buyers’ Plan (HBP) Home Equity Home Equity Line of Credit (HELOC) Home Inspection Interest Land Transfer Tax Maturity Date Mortgage Mortgage Broker Mortgage Default Insurance Mortgage Discharge Mortgage Life Insurance Mortgage Payment Mortgage Pre-Approval Mortgage Principal Mortgage Statement Mortgagee Mortgagor Multiple Listing Service (MLS) Offer Open Mortgage Posted Rate Prepayment Prepayment Charge Prime Rate Property Insurance Property Tax Qualifying Rate Renewal Reverse Mortgage Second Mortgage Statement of Adjustments Survey Term Title Title Insurance Total Debt Service Ratio Variable-Rate Mortgage
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