This piece was originally published on October 5, 2020, and was updated on August 23, 2022.
If you’re looking to dive into homeownership, it’s important to be prepared at every step. Besides tracking interest rates and hunting for the perfect home, applying for a mortgage is the biggest step in the process. While it might seem stressful, it can be made much easier if you get your financial affairs in order ahead of time. Here are 7 ways to help get your mortgage application approved.
1. Check your credit score
In Canada, credit scores run from 300 to 900 across five categories: Poor, Fair, Good, Very Good and Excellent. The exact categories vary based on which credit bureau is being used, but the process is essentially the same. Your credit score is a snapshot of your overall financial health, so it’s important that you know what yours is.
Mortgage lenders will use your credit 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. Ideally, you want your score to be at least 660, but higher is always better. In addition to your overall numerical score, your credit report will also contain information about late payments, the number of accounts you have open, your overall debt levels and the length of your credit history. Making loan and bill repayments on time and not using too much of your available credit will generally leave you with a higher score.
You can check your credit score for free with several online companies. Online credit checks will pull your score from one of Canada’s two credit bureaus, Equifax or TransUnion. It’s a good idea to check your score each quarter, and do everything you can to increase your credit score.
2. Save a larger down payment
Buying a home will always require some amount of cash up front, also known as a down payment. The bigger your down payment is, the better, for a few reasons. The main reason is simply that the larger your down payment, the less you’ll need to borrow, and therefore the less interest you’ll pay. However, just getting approved for a mortgage relies on the down payment as well.
What’s the minimum down payment for mortgage approval? In Canada, there are minimum down payment requirements based on the home’s price:
- Less than $500,000: The minimum down payment is 5% of the purchase price.
- $500,000 to $999,999: You’ll need 5% of the first $500,000, and 10% for the portion of the purchase price above $500,000.
- $1 million+: 20% of the total purchase price at minimum.
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 homes in cities like Toronto and Vancouver can run north of a million dollars! However, the more cash you put down up front, the more likely you are to get approved by a mortgage lender. Using our mortgage payment calculator can help you test down payment and amortization scenarios, and compare variable and fixed mortgage rates.
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3. Keep your income stable
While you’re applying for a mortgage, it’s important to keep your day job. Mortgage providers won’t approve your mortgage without proof you can make your payments. A full-time job is the best way to prove that, as it guarantees your income long-term. Having been with an employer for a long time will also help your application, though it’s not the only thing that matters. If you’re applying for a mortgage with your partner, both of you having full-time jobs is ideal.
Note that as long as the coronavirus pandemic continues, the stability of your income is even more important than normal. The last thing you want is to take out a mortgage just before you lose a major source of income! However, given the recent volatility in the job market, you may also be in a situation where you get a job opportunity that's very hard to pass up. In this case, you should read our piece on changing jobs while shopping for a home.
If you’re employed on a casual basis, it might be worth looking for a permanent role for the duration of your mortgage application, even if it’s just part-time. Getting a great mortgage with a low rate can save you tens of thousands of dollars, so it could be worth finding some more stable employment while you finish your application.
If you’re self-employed, things can get a little more tricky. You’ll be required to provide details on your business and income for several years, proving that you’ll be able to stay profitable long-term in order to meet your mortgage payments. The best thing you can do to get approved for a mortgage if you’re self-employed is to get in touch with a licensed mortgage broker. Mortgage brokers have all the background knowledge you’ll need the prepare the best possible application.
4. Pay down existing debt
Taking on a mortgage means taking on some long-term debt, so you’ll want to minimize your existing debt. Once you get your mortgage, paying it will be much easier if you don’t have other debts to service. Existing debt will also make it more difficult to be approved for a mortgage, as lenders will look at your debt-to-income ratio when considering whether or not to lend to you.
Your balances across your credit cards, lines of credit, or student loans don’t necessarily need to be at $0. However, your existing debt will impact how much you’ll be able to borrow and at what rate. Keeping debt levels low is also good for your credit score in general.
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5. 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 valid for 90 to 120 days, depending on the lender, giving you time to find a home without losing a great mortgage deal.
Besides your credit score and the size of your down payment, mortgage lenders will also consider your income and employment status, debt-to-income ratio and your 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.
6. Get a great rate
Getting a great rate is generally seen as the outcome of a mortgage application, but it goes both ways. By shopping around or using a mortgage broker, you’ll often find lenders offering lower rates. With a better mortgage rate your monthly payments will be lower, making it easier for you to service your mortgage. This will typically make it easier to be approved for a mortgage, and allow you to borrow more.
The best place to start is by checking out the current best mortgage rates across the country. These will often be available through mortgage brokers, who won’t charge you for a consultation. This can be really useful, as they can also give you personalized advice.
7. Know what you can afford (and what you can’t)
How much of a mortgage you can afford is affected by several things, including your expected mortgage payments, living costs, debt repayments and other financial obligations. While mortgage lenders will consider all of these, it’s important to be honest with yourself about what you can afford.
Only you can fully understand your financial and lifestyle needs. Things like how much you spend on childcare, groceries or supporting your parents can be missed in the mortgage application process. On top of that, your future plans could change your financial situation. While you don’t need to tell your bank if you plan to quit your job or have a child, these events would seriously affect your ability to afford your mortgage. You should also factor in other purchasing costs, like home inspections and closing costs (usually about 3-4% of the purchase price). Remember that you’ll have to pay for utilities, upkeep, property taxes and repairs too.
Decide what you can realistically afford now and in the future, and then stick to it. If your finances are good, you might get approved for a higher mortgage than expected. Resist the temptation to spend every dollar you’re approved for and consider what you can actually afford.
The bottom line
Getting a mortgage approval is about getting your financial life in order. Keeping your credit score high, paying down debt, and saving money are all worth doing, whether you’re applying for a mortgage or not. Even if you’re not looking to buy a home now, look after your finances today and you’ll be in a stronger financial position tomorrow, whatever you decide to do.