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.
Requirements to Apply For a Mortgage in Canada
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:
Good credit score – 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.
Sufficient income – 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.
Minimal debts – 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.
Down payment – To secure a conventional mortgage, you need to come up with a down payment that goes towards the purchase price of the home. 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.
Down Payment Rules in Canada
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.
Working With a Bank Vs. Working With a Mortgage Broker
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 that they have 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.
Deciding Between a Fixed Rate and a Variable Rate
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.
Fixed-rate mortgages may be more suitable for those who appreciate the predictability of their mortgage payments. Since the rate will not change, their mortgage payments will stay the same, which makes budgeting easier. And if mortgage rates are expected to increase at some point in the near future, locking in with a fixed-rate mortgage may be a sound way to hedge against the risk of rising rates.
Variable-rate mortgages might also be a great option in certain circumstances. These types of mortgages offer introductory periods where the interest rate is usually lower than fixed-rate mortgages. But once that introductory period expires, the rate will change and can go either up or down, depending on the market at the time.
Choosing The Best Mortgage Payment Frequency
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:
- Semi-monthly (twice a month)
- Bi-weekly (every two weeks)
- Weekly (every week)
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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.
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:
- Lawyer fees
- Title insurance fees
- Appraisal fees
- Home inspection fees
- Land Transfer Taxes
- Status Certificate access (if you’re buying a condo)
- Land survey fees
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.
Need a Mortgage Lender in Canada?
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. Call Loans Canada today and we’ll help connect you to the right mortgage lender for you.