If you’re looking to dive into homeownership, it pays off to be prepared every step of the way. Besides tracking interest rates and house hunting, applying for a home loan is the biggest step in the process. It can seem stressful, but it’s a lot easier if you’re organized and educated about getting your financial affairs in order. Here are a few tips to help get your mortgage loan application approved.
1. Check your credit score
In Canada, credit scores run from 300-900 across five categories: poor, fair, good, very good and excellent (exact category names may vary by credit bureau). Your credit score is considered a snapshot of your overall financial health, so checking it is one of the first things you should do. Among other factors, mortgage lenders use your score to gauge your financial trustworthiness and ability to repay your debts. The higher your credit score, the more likely you’ll be offered the lowest mortgage rates in Canada. In addition to your overall numerical score, your credit report will also contain information about late payments, number of accounts open, overall debt levels and length of credit history.
It only takes a few minutes check your credit score online through verified websites such as Borrowell, Credit Karma, or Ratehub.ca – which pull your score from one of Canada’s two credit bureaus, Equifax and TransUnion. In general, it’s a good idea to check your credit score and report once a quarter for any unusual activity that could signal reporting errors or identity theft.
2. Set a down payment goal
Buying a home requires throwing down some cash up front, also known as a down payment. There are a few federal down payment requirements based on the home’s price:
- $500,000 or less: minimum down payment of 5% of purchase price.
- $500,000 to $999,999: 5% of the first $500,000 of the purchase price, and 10% for the portion of the purchase price above $500,000.
- $1 million or more: 20% of purchase price.
In Canada, a down payment of less than 20% of the home’s purchase price requires the buyer to buy mortgage loan insurance. Paying these insurance premiums will increase your monthly mortgage payment.
Overall, you’ll want to save up as much as you can for your down payment. Of course, that’s easier said than done when houses in major cities such as Toronto and Vancouver can run into the million-dollar-plus range. However, the more cash you put down up front, the more likely you are to get approved by a mortgage lender. And the higher your down payment, the lower your monthly mortgage payments. If you’re a first-time buyer, using a mortgage payment calculator can help you test down payment and amortization scenarios, and compare variable and fixed mortgage rates.
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3. Pay down existing debt
Taking on a mortgage means assuming responsibility for long-term debt, so you’ll want to make sure you pay down as much existing debt as possible. Your balances across any credit cards, lines of credit or student loans you hold don’t necessarily need to be at $0, but lenders will look at your debt-to-income ratio when considering whether or not to lend to you, how much and at what rate. Keeping debt levels low is also good for your credit score in general.
4. Get a mortgage pre-approval
A mortgage pre-approval is when a lender evaluates your financial situation and pre-approves you for a set mortgage amount, interest rate and term. Mortgage pre-approvals are typically valid for around 90 to 120 days. Besides your credit score and the size of your down payment, mortgage lenders will also consider income and employment status, debt-to-income ratio, and assets and liabilities. A mortgage pre-approval is a good thing to have because it allows you to house hunt within your price range, and also means you can move quickly to submit an offer when you find your dream home.
5. Be realistic about what you can afford
Mortgage affordability encompasses a few things beyond mortgage payments, including living costs, debt repayments and other financial obligations. Mortgage lenders will consider your credit score/report and income when determining how much to lend you, but only you know your full financial picture, like how much you spend on childcare and groceries for your family of five, or the fact that you’re also supporting elderly parents. You might get approved for a higher mortgage than you expected, but you don’t need to buy at the highest price point you’re approved for — consider what you can actually afford.
When thinking about affordability, prospective homeowners should also factor in a few other costs that can add up: home inspections, closing costs (usually about 3-4% of the home’s purchase price) and other miscellaneous fees. You should also consider that once you own a home you’ll have to pay for utilities, upkeep, property taxes and any unexpected repairs.
- What to do (and not do) for mortgage pre-approvals
- What is a mortgage pre-approval?
- Understanding the differences in pre-approval, pre-qualification and rate holds