Nine criteria lenders use when assessing your mortgage application

By Ericka Pingol

The mortgage application process is rigorous—and often stressful. Even if you’re a seasoned investor or a first-time homebuyer, you may feel as if your whole life is under tight scrutiny by the lenders, with all your vulnerabilities exposed. However, it’s a hurdle you need to overcome to achieve your dream of having your own property.

Consider the following criteria lenders may use to assess your application when preparing for the home buying process:

  1. The type of borrower you are. Lenders prefer some borrowers over others in terms of age. You must be at least 18 years-old to be approved for a home loan. However, lenders may be hesitant to lend to older borrowers, particularly those over 55.

Residency status may also affect your application. If you are a non-resident, you can still buy a property in Canada without any restrictions. However, some banks may restrict the number of properties they will finance. You may also have to pay a 15% Non-Resident Speculation Tax when purchasing as a non-resident.

  1. Employment. Lenders will most likely look at your employment to determine if you have a stable source of income.

However, you have to keep in mind that your type of employment and the length of your employment will be scrutinized. If you are a casual or seasonal employee or have been employed by the same company for only a couple of months, you may face a greater challenge to get your home loan approved.

If you are a self-employed borrower, the mortgage application may be a bit more complicated for you. The Office of the Superintendent of Financial Institutions introduced the Guideline B-21, requiring federally regulated banks to look closer at self-employed incomes before approving an application.

  1. Income. Your income greatly affects your mortgage application. Lenders will assess your income to determine your ability to make repayments. Your income helps a lender calculate the size of a home loan payment you will likely be able to manage.
     
  2. Credit score. Lenders will assess your credit score and your debt repayment history. Credit scores range from 300 (when you’re just getting started) to 900 (the best score), according to TransUnion

A score above 650 may help you qualify for a standard loan. However, if your score is under 650, you may have difficulty receiving new credit.

  1. Expenses. Lenders will assess your monthly expenses to determine the income that is not devoted to paying bills, necessities, and other spending.

Your expenses affect your mortgage affordability. Lenders may look at two ratios to determine how much you can borrow.

They may look at your Gross Debt Service (GDS) ratio, which is the percentage of your monthly household income that covers your housing costs. It should be at or under 35%. They may also evaluate you Total Debt Service (TDS) ratio. This is the percentage of your monthly household income, covering your housing costs and other debts. It should be at or under 42%.

  1. Assets and liability. Your assets include your vehicles, superannuation, and any properties you own. On the other hand, liabilities are debts you have, including credit cards, personal loans, and other debts. Lenders will look at both of your assets and liability in assessing your application.
     
  2. Down payment. A bigger deposit may show lenders that you have the financial discipline needed for a mortgage. Most lenders want to see at least 5% of your deposit coming from genuine savings—fund you have held in your account for at least three months. If your deposit is less than 20%, you have to pay for Canada Mortgage and Housing Corporation (CMHC) insurance which covers your lender if you default on your loan.

In general, you need the following amount for a deposit:

  • If your desired house costs up to $500,000, the minimum down payment is 5%
  • If you want a house amounting to more than $500,000 but less than $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance
  • If you want a home that costs $1 million and above, the minimum down payment is 20%
  1. Requested amount to borrow. The size of your home loan affects how lenders assess your application. The amount you wish to borrow must not exceed the loan’s maximum loan-to-value ratio (LVR). Make sure that your proposed borrowing amount fits between the minimum and maximum loan limits imposed by the lender.
     
  2. The type of property. The type of property you wish to buy will be used as security for your home loan. If you default on the loan, the lender will sell the property to retrieve the money you owe. Lenders carefully assess the type of property you wish to buy in terms of location, nature, size, and title.

What to do before applying for a mortgage

There are many things that you should get in order before submitting your mortgage application. Consider doing the following preparations which may make the home buying process a bit easier:

  • Check your credit. Run a credit check to better prepare for a home loan application. Get a copy of your credit file which will help you be ready to answers any questions a potential lender might have.

You may get a credit report using national credit reporting agencies such as Equifax and TransUnion.

  • Consolidate debt. If you have multiple debts, it may be a smart move to consolidate them before applying for a home loan. Having various debts will greatly affect your chance of getting a good home loan—lenders will raise an eyebrow when they see you have to pay quite a handful of debt on top of your requested mortgage.

Consider consolidating all of your debts into one loan so you may be able to avoid paying off higher interest rates and save money towards your mortgage.

  • Asses your financial situation. Take off the rose-tinted glasses and look closely at your financial situation. Be realistic about your assessment and see if it would be a good idea to get mortgage given the state of your finances.

Evaluate your savings history and make sure you have a good one. Consistent savings account with a regular money flow shows that you have the stability to a lender.

Consider creating a checklist laying out your expenses and savings so you would have a better image of how a mortgage repayment may fit in.

  • Prepare paperwork. Applying for a home loan means preparing a lot of documents. Before you step into your lender’s office, make sure you have all the needed documents, as incomplete documentation may slow down your home loan application.

Most lenders require the following documents:

  • Identification
  • Employment history
  • Mortgage pre-approval
  • Down payment confirmation
  • Bank statements (three months’ worth)
  • Current value of RRSPs
  • List of assets and liabilities
  • Current value of any stocks, bonds, mutual funds, and other investments
  • Complete description of property
  • Address of property
  • Copy of MLS listing
  • Signed copy of the agreement of purchase and sale
  • Plans and specification

Make sure to prepare all related paperwork before you walk in a lender’s office—it may make the loan application a bit easier.

  • Know other fess involved. A home purchase involves related costs, aside from a deposit. Consider saving for various costs and fees the home buying process may incur. Some of these are:
     
  • Down Payment (usually 4-20% of the total home purchase price)
  • CMHC insurance if your deposit is less than 20%
  • Property tax, which may vary where the property is located
  • Legal fees
  • Inspection costs
  • Others costs for utilities, moving, rate and strata fees, and home insurance

Pre-approval, final approval, and closing day

Once you have lodged your application, the waiting game starts. The time it takes to get a home loan approval depends on the lender’s timeline:

  • Pre-approval. This is the stage where you lodge your initial home loan application. It indicates that pending further documentation and review, a lender may be willing to lend you a certain amount for your home loan. This stage gives you an idea of how much you may be able to borrow.

Take note that a pre-approval is not a binding agreement that your application will be approved. Instead, it indicates that your lender will let you borrow a certain amount in principle.

Some of the benefits of a pre-approval are:

  • You will know the maximum amount you are allowed to borrow and what your mortgage repayments will be
  • It will give you an idea on what type of properties you can buy and in what location
  • Going through the pre-approval stage early will save you time in the home loan application process

To get pre-approval, you will need to submit a completed mortgage application form with supporting documents such as:

  • Photo ID
  • Record of employment such as paystub, T-4 slip or a personal income tax return (if you are self-employed)
  • A letter from your employer stating the length of employment and current salary
  • Account numbers and locations of your bank accounts and investments
  • Proof of assets and liabilities
     
  • ​​​​​​​​​​​​​​​​​​​​​Full approval. After getting a pre-approval, your application may move toward full approval. You need to provide a copy of the signed contract of the property you’re buying, and then the lender may conduct a valuation of the property to know how much it is worth. It dictates the amount your lender is willing to lend you.

Further credit checks and document review may be done during this stage. Prepare to provide other documents that your lender may request.

  • Closing day. Once your loan application has been approved, you may receive your loan offer documents. Here are the things that may occur during closing day:
    • Your lender provides the mortgage money to your lawyer or notary
    • You provide the rest of the purchase price to your lawyer or notary as well as the closing costs
    • Your lawyer or notary pays the person who is selling the house, registers the home in your name, and then gives you the deed and keys to your new home

After the closing day, you’re all set to move into your home!

 

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