Buying a home is one of the biggest financial decisions you’ll ever make. To secure a mortgage, lenders want to see that you meet certain criteria. Qualifying for a mortgage can seem daunting, but with the right preparation, you can improve your chances of getting approved. In this post, we’ll explore the steps to qualify for a mortgage, covering the key factors lenders look at, from credit scores to income, and the necessary documents you’ll need. We’ll also share tips to help you get ready for this major financial milestone.
1. Understand Your Credit Score
Your credit score plays a huge role in your mortgage approval. Lenders use this three-digit number to determine how risky it is to lend you money. A higher score shows that you have a good history of managing debt, while a lower score may make it harder to qualify or result in higher interest rates.
What Credit Score Do You Need?
In Canada, credit scores range from 300 to 900. Most lenders require a minimum credit score of 600-650 to qualify for a mortgage, though the best rates are reserved for those with scores of 700 and above. If your score is below the required range, you may still qualify for a mortgage, but you might need a larger down payment or pay a higher interest rate.
How to Improve Your Credit Score
- Pay your bills on time – Late or missed payments can lower your score.
- Reduce your debt – Try to keep your credit card balances below 30% of your limit.
- Don’t apply for new credit – Each new credit application can temporarily lower your score.
For more tips on improving your credit, check out our post on understanding credit card fees.
2. Review Your Income and Employment
Lenders need to know you have a steady income to afford mortgage payments. They’ll look at your income, employment history, and whether your job is full-time, part-time, or self-employed.
What Income Do Lenders Require?
Your income should be sufficient to cover your mortgage payments, property taxes, and other costs like utilities. Lenders often use the Gross Debt Service (GDS) ratio, which should ideally be below 35%. This means that no more than 35% of your income should go towards housing-related expenses. Additionally, your Total Debt Service (TDS) ratio, which includes all your debts, should be below 42%.
Documentation You’ll Need
To prove your income, you’ll need to provide:
- Recent pay stubs
- T4 slips or tax returns
- A letter from your employer
If you’re self-employed, you may need to show business financial statements and tax returns for the past two years. Lenders want to see consistent income over time.
3. Save for a Down Payment
In Canada, you need a minimum down payment of 5% for homes costing $500,000 or less. For homes over this amount, you’ll need 10% for the portion above $500,000. Homes priced at $1,000,000 or more require a 20% down payment.
Down Payment Tips
- Start saving early – The larger your down payment, the lower your monthly mortgage payments.
- Use your RRSP – The Home Buyers’ Plan allows first-time homebuyers to withdraw up to $35,000 from their RRSP to use for a down payment.
- Consider a gift – Some lenders allow down payments to come from a family member as a gift, provided you provide documentation.
To learn more about mortgage rates and lenders, see our other posts about mortgages in Canada.
4. Get Pre-Approved
Before you start house hunting, it’s wise to get pre-approved for a mortgage. Pre-approval gives you an idea of how much you can borrow and shows sellers you’re serious. Lenders will review your financial situation and provide you with a pre-approval letter outlining the maximum loan amount you qualify for and the interest rate.
How to Get Pre-Approved
To get pre-approved, you’ll need to provide:
- Personal information (name, date of birth, address)
- Proof of income
- Details of your assets and debts
Benefits of Pre-Approval
- Confidence in your budget – You’ll know how much you can afford to spend on a home.
- Faster closing process – Sellers are more likely to accept your offer if you’re pre-approved.
5. Gather Your Documents
When it’s time to officially apply for a mortgage, you’ll need to provide a range of documents. Having everything ready in advance can speed up the process.
Required Documents
- Proof of income – Pay stubs, tax returns, or financial statements
- Proof of assets – Bank statements or investment accounts
- Proof of identity – Government-issued ID
- Proof of down payment – Savings or RRSP withdrawal statements
- Credit history – Lenders will pull your credit report to assess your creditworthiness.
Make sure all documents are up to date and easy to access. If you’re applying with a co-borrower, both of you will need to provide this information.
6. Understand Closing Costs
In addition to your down payment, there are closing costs to consider. These are one-time expenses related to finalizing your mortgage and purchasing the property.
Common Closing Costs
- Legal fees – Lawyers help with the paperwork and registration of your mortgage.
- Land transfer tax – Depending on your province, this can range from 0.5% to 2.5% of the home’s purchase price.
- Home inspection – A thorough inspection can reveal potential issues with the property.
- Title insurance – This protects you in case of issues with the property’s title.
Plan for these costs in advance, as they typically amount to 1.5% to 4% of the home’s purchase price.
7. Improve Your Chances of Approval
If you’re worried about meeting the requirements for a mortgage, there are steps you can take to boost your chances of approval.
Tips for Improving Your Mortgage Approval Odds
- Check your credit report – Make sure there are no errors on your credit report that could impact your score.
- Lower your debt – Pay down credit card balances and reduce other debts before applying.
- Increase your down payment – A larger down payment reduces the lender’s risk, which can improve your chances of approval.
- Consider a co-signer – If your income or credit score isn’t strong enough, a co-signer with better credit may help.
Qualifying for a mortgage in Canada requires careful preparation. By improving your credit score, saving for a down payment, and ensuring you have the right documents, you can boost your chances of getting approved for the mortgage you need to buy your dream home. Taking these steps now can help set you up for success in the future.
