Taking out a mortgage to finance a home purchase is a massive financial undertaking. Given how big these loans are, it can be tough to meet the approval requirements. To boost your odds of approval, you’ll want to go into the application process with a strong financial and credit profile.
Let’s take a closer look at how to get approved for a mortgage and where to look to get one.
Key Points
- Several steps are involved in getting a mortgage, including getting your finances and credit score prepared before officially applying.
- To find the best deals on mortgages, you may want to consider shopping around using an online loan comparison site or working with a mortgage broker.
- Ultimately, you want to make sure you can comfortably afford your mortgage payments before committing to this long-term loan.
How To Get A Mortgage In Canada: Mortgage Application Process
The mortgage process in Canada is a detailed one. To ensure that things move along smoothly with few hiccups, it’s important to be fully prepared for what’s to come. Here are the steps involved in the mortgage application process in Canada:
Step 1. Speak With A Mortgage Broker
Your first step is to participate in a discovery call with your mortgage broker to discuss your options and financial situation. Your broker will provide you with options based on your current financial health. This will include the loan options available, and the loan amount you may be able to qualify for. You’ll also be briefed on any potential roadblocks you may encounter, particularly if your credit score is a little low.
Step 2. Get Pre-Approved
Getting pre-approved for a mortgage is an important step before you actually start the house-hunting process. For starters, a pre-approval will tell you roughly what kind of loan amount you may qualify for, which can help you narrow down your options and focus only on homes that fit within your budget.
Further, pre-approval will show sellers that you’re a serious and qualified buyer. It should be noted that pre-approval is no guarantee that you’ll receive final approval after the seller accepts your offer.
Step 3. Get Final Mortgage Approval
Once the seller accepts your offer, you can start the process of getting final mortgage approval. During this step, your lender will need a copy of your purchase agreement and may require further documentation to prove your financial health. Your lender may also conduct a credit check to verify your creditworthiness and may order an appraisal as part of the process.
Step 4. Fulfill Your Offer Conditions
Your offer may likely include a few conditions, such as financing or home inspection conditions. These conditions must either be fulfilled or waived before their respective expiry dates in order for the transaction to continue.
Step 5. Make Sure Your Deposit And Down Payment Funds Are Ready
While you may require financing to help cover the purchase price of your home, you’ll still be required to cover certain expenses upfront, such as your deposit and down payment. The deposit, in particular, will be required within 24 hours of the deal closing. As such, you’ll want to make sure that you have these funds ready to access.
Step 6. Close The Deal
On closing day, you’ll need to cover a variety of closing costs, which typically add up to anywhere from 1.5% to 4% of the home’s purchase price. You’ll also have to sign a variety of documents with the help of your lawyer. Then, the deal is sealed.
Documents Required To Get A Mortgage In Canada
You’ll need to supply a variety of documents to prove your financial and credit health when applying for a mortgage in Canada:
| Personal Information Documents | To verify your identity, your lender may request: – Government-issued photo ID, such as a passport or driver’s license. – Social Insurance Number (SIN), which is required for filing income taxes, opening a bank account, and accessing government benefits. |
| Employment/Income Documents | To prove your income & employment, your lender may request: – Pay stubs Tax returns – Notice of Assessment |
| Personal Financial Documents | Your personal finances and credit health will be verified. You may need to supply the following as supporting documents: – Bank account information Statement of assets or investments – Pre-approval letter (if applicable) – Credit report |
| Down Payment Documents | To prove where the money from your down payment is coming from, you may need to provide the following: – Savings or statement of investments from the last 90 days – Sale agreement of an existing property – Withdrawals From Your RRSP Gift Letter |
| Property Documents For The Home You’re Buying | Your lender will need the following documents about the home you’re buying: – Purchase and sale agreement MLS listing – Legal property description – Proof of home insurance – Title insurance Well and septic certificates (for rural properties) – Status Certificate (if buying a condo) |
How To Get Approved For A Mortgage In Canada?
If you’re wondering how to get approved for a mortgage and boost your odds of approval, follow these tips:
Improve Your Credit Score
Pull your credit report to see what your credit history looks like. If you see any mistakes, inform the credit bureau and have them fixed.
You should also see what your credit score is. If it’s a little low, consider taking some time to improve it, like paying your bills on time and keeping your credit utilization ratio low. Ideally, your credit score should be at least 680 before applying for a mortgage to increase your chances of approval.
A higher credit score can help you secure a lower rate because it reduces the perceived risk for the lender. The higher your score, the better. Take some time to give your score a boost before applying.
Reduce Your Debt-To-Income Ratio
Calculate your debt-to-income (DTI) ratio, which measures your income relative to your debt. In other words, your DTI represents how much of your income goes towards paying your debt. Generally speaking, your DTI should be no more than 44%.
Increase Your Down Payment
In Canada, the minimum down payment that you need to make is 5%. The more you put down, the smaller the loan amount you’ll need, and the better your odds of loan approval.
Plus, you can reduce the interest paid on your mortgage with a bigger down payment because it lowers the lender’s risk. If you make a down payment of at least 20%, you can also save more money by avoiding mortgage default insurance.
See what your savings are like to determine how much of a down payment you can make on your mortgage.
How To Shop For A Mortgage In Canada
When looking for a mortgage, it’s best to compare options or speak with a mortgage broker to guide you through your options.
Use A Mortgage Broker
You can use a mortgage broker, an independent professional who works with various lenders to help borrowers find the right lender and mortgage product. You can apply just once with a broker, who will then shop around for you and negotiate with lenders to get you the best deal.
Use A Loan Comparison Site
While you may approach your bank for a mortgage, you may want to shop around first to see what’s out there. An online loan comparison site is the easiest and fastest way to compare loan offers from various lenders across Canada. Simply enter a few details about yourself and the loan you need, and the site will populate a list of available lenders and offers, which you can compare side-by-side to see where the best deal is.
Comparison shopping can help you find the best deal on a mortgage, which can help you save a lot of money in interest over the loan term and amortization period.
Even a reduction of 1% on your interest rate can save you thousands of dollars over the life of your loan. The following example illustrates how much you could possibly save by shaving 1% off your interest rate, assuming the following:
- $400,000 mortgage
- 25-year amortization
- 5-year term
| Interest Rate | Mortgage Payment Amount (Monthly) | Interest Paid Over The Term | Interest Paid Over The Amortization |
| 4.75% | $2,269.82 | $88,812.76 | $280,946.70 |
| 5.75% | $2,500.09 | $108,069.01 | $350,026.54 |
As you can see, you’d be saving over $19,000 in interest over the 5-year term and roughly $69,000 over the 25-year amortization period. Plus, your monthly mortgage payments would be about $230 less every month as well.
Things To Consider When Shopping For A Mortgage
Here are some of the key components that you should consider when comparing mortgages:
Mortgage Types
- Open Mortgages — These programs provide flexibility when it comes to paying off part or all of the loan early without penalty. However, open mortgages also mean you’ll be vulnerable to interest rate fluctuations.
- Closed Mortgages — A closed mortgage typically has lower interest rates than open mortgages in exchange for the lack of flexibility. Breaking the mortgage early can result in penalty fees.
- Fixed-Rate Mortgages — With this mortgage type, the interest rate is locked in for the term. This provides stability and predictability in mortgage payments.
- Variable-Rate Mortgages — The interest rate may fluctuate with the prime rate set by the Bank of Canada.
- Adjustable-Rate Mortgages (ARMs) — These usually start with a fixed rate for an initial period, after which the rate adjusts periodically based on an index rate and margin.
- Conventional Mortgages — These are standard mortgages where the down payment is at least 20% of the purchase price. These mortgages do not require mortgage default insurance.
- High-Ratio Mortgages — If the down payment is less than 20%, the mortgage is considered to be ‘high-ratio’, in which case mortgage default insurance would be required.
Amortization Period
The amortization period is the length of time it will take to pay back your mortgage loan. It’s important to distinguish amortization from the mortgage term. If your mortgage is insured, the maximum amortization is 25 years, unless you’re a first-time buyer purchasing a newly-built home.
Mortgage Term
This is the length that your mortgage term is in effect. The average borrower will have several terms before they fully pay back their mortgage.
Interest Rates
The interest rate is the cost of borrowing. The higher the rate, the more interest you’ll pay over the life of the loan, and vice versa.
Payment Frequency
The frequency with which you’ll make mortgage payments can vary depending on the schedule you choose. Mortgage payment schedules include the following:
- Monthly
- Semi-monthly
- Bi-weekly
- Accelerated* bi-weekly
- Weekly
- Accelerated** weekly
*”Accelerated bi-weekly” mortgage payments involve making 26 payments every year, which means a little more toward the principal is made, helping you pay your mortgage off faster.
**”Accelerated weekly” mortgage payments involve making 52 payments every year, which means more money goes toward the principal annually, helping you pay your loan off faster.
Mortgage Default Insurance
This insurance policy protects your lender (not you, the borrower) should you be unable to make payments anymore, and is required if your down payment is less than 20%.
Mortgage Security Registration
Your lender may register your mortgage security as a standard charge or collateral charge.
- A standard charge only secures the loan amount, which makes switching lenders at the end of your term easier.
- A collateral charge secures the mortgage and other potential loans, such as credit lines, making borrowing more flexible but switching lenders possibly more complicated.
Important Questions To Ask Yourself About Mortgages
To help you have a better understanding of what you want and what you can afford, ask yourself the following questions before you start shopping around for a home loan:
- How much have you saved for a down payment, and do you want to spend it all?
- What’s your realistic price range?
- Have you considered and planned for all the extra costs associated with both buying and owning a house?
- Are you planning any serious lifestyle changes in the near or distant future?
Other Things To Consider When Getting A Mortgage
Consider Down Payment Assistance
If you’re having trouble coming up with a lump sum of money to use as a down payment, there are down payment assistance programs you may be eligible for.
For instance, the Home Buyers’ Plan (HBP) is a federal program that allows first-time homebuyers to withdraw up to $60,000 from their RRSPs tax-free to put towards the down payment.
Provincial down payment assistance programs are also available to help cover the cost of a down payment on a home.
Consider All Costs
Beyond the actual price of the home and the down payment that you need to make, there are a lot of other costs that you need to consider, such as the following:
Closing Costs
Closing costs need to be paid upfront before the deal is sealed. You must have the money available to cover them all. Generally speaking, you can expect to pay anywhere from 1.5% to 4% of the price of your house in closing costs.
The following are examples of some of the closing costs you might have to pay:
- Legal fees
- Land transfer taxes
- Mortgage default insurance (if not rolled into your mortgage payments)
- Appraisal fees
- Home inspection fees
- Title insurance fees
- Property tax and utility adjustments
- Interest adjustments
- Water tests
- Septic tank tests
Other Upfront Costs
Several other costs may be required that are not typically included in closing costs, such as:
- Moving costs
- Utility fees
- Furniture and appliances
- Painting
- Cleaning
Final Thoughts
There are several factors to consider when purchasing a house and taking out a mortgage. Get your finances in order and speak to the appropriate professionals to ensure you go into the mortgage process fully prepared and qualified.
