Getting pre-approved and qualifying for a mortgage

From: Financial Consumer Agency of Canada

Where to get a mortgage

There are a number of different sources for mortgages.

Mortgage lenders

Mortgage lenders lend money directly to you.

Mortgages are available from several types of lenders, such as:

  • banks
  • caisses populaires
  • mortgage companies
  • insurance companies
  • trust companies
  • loan companies
  • credit unions

Different lenders may have different interest rates and conditions for similar products. Talk to several lenders to make sure you’re getting the best mortgage product for your needs.

Although you may decide to switch lenders later, it’s important to be comfortable with the lender and the mortgage options they offer you right from the start. If you switch lenders after signing your mortgage contract, your lender may charge you a prepayment penalty. Make sure you understand the terms and condition of your mortgage contract.

Learn the costs of breaking your mortgage contract.

Mortgage brokers

Mortgage brokers don’t lend money directly to you. Mortgage brokers arrange transactions by finding a lender for you.

Some lenders only offer their products directly to borrowers, while some mortgage products are only available through brokers. Since brokers have access to a number of lenders, they may give you a wider range of mortgage products and terms to choose from.

Mortgage brokers don’t all have access to the same lenders. This means the available mortgages vary from broker to broker. When you’re considering a mortgage broker, ask which lenders they deal with.

Mortgage brokers generally don’t charge fees for their services. Instead, they usually receive a commission from the lender when they arrange a transaction.

Get a list of mortgage brokers in your area from Mortgage Professionals Canada.

The provinces and territories regulate mortgage brokers.

To confirm that a broker is licensed, or to make a complaint, contact your provincial or territorial regulator.

The pre-approval process

A pre-approval is when a potential mortgage lender looks at your finances to find out the maximum amount they will lend you and what interest rate they will charge you.

With a pre-approval, you can:

  • know the maximum amount of a mortgage you could qualify for
  • estimate your mortgage payments
  • lock in an interest rate for 60 to 120 days, depending on the lender

The pre-approval amount is the maximum you may get. It does not guarantee that you'll get a mortgage loan for that amount. The approved mortgage amount will depend on the value of your home and the amount of your down payment. It may be a good idea to also look at properties in a lower price range so that you don’t stretch your budget to its limit.

Remember that you’ll also need money for:

  • closing costs
  • moving costs
  • ongoing maintenance costs

Check your credit report

Before you start shopping around for a mortgage, order a copy of your credit report. Make sure it does not contain any errors. A potential lender will look at your credit report before approving you for a mortgage.

If you don’t have a good credit score, the mortgage lender may:

  • refuse to approve your mortgage
  • decide to approve it for a lower amount or at a higher interest rate
  • only consider your application if you have a large down payment
  • require that someone co-sign with you on the mortgage

Learn how to order your credit report.

Find out how to check your credit report for errors.

What to provide to your lender to get pre-approved

Before pre-approving you, a lender will look at your current assets (what you own), your income and your current level of debt.

You’ll need to provide your lender or mortgage broker with the following:

  • identification
  • proof of employment
  • proof you can pay for the down payment and closing costs
  • information about your other assets, such as a car, cottage or boat
  • information about your debts or financial obligations

For proof of employment, your lender or mortgage broker may ask you to provide:

  • proof of current salary or hourly pay rate (for example, a current pay stub and a letter from your employer)
  • your position and length of time with the organization
  • Notices of Assessment from the Canada Revenue Agency for the past two years, if you're self-employed

For proof you can pay the down payment, your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments.

Your debts or financial obligations may include:

  • credit card balances and limits, including those on store credit cards
  • child or spousal support amounts
  • car loans or leases
  • lines of credit
  • student loans
  • other loans

Questions to ask your lender or broker when getting pre-approved

When getting pre-approved, ask your broker or lender the following:

  • how long they guarantee the pre-approved rate
  • will you automatically get the lowest rate if interest rates go down while you're pre-approved
  • if the pre-approval can be extended

Qualify for a mortgage

To qualify for a mortgage, you’ll have to prove to your lender that you can afford the amount you're asking for.

Mortgage lenders or brokers will use your financial information to calculate your total monthly housing costs and total debt load to determine what you can afford.

Lenders will consider information such as:

  • your income (before taxes)
  • your expenses (including utilities and living costs)
  • the amount you’re borrowing
  • your debts
  • your credit report and score
  • the amortization period

Total monthly housing costs

Your total monthly housing costs shouldn’t be more than 32% of your gross household income. This percentage is also known as the gross debt service (GDS) ratio.

These housing-related costs include:

  • mortgage payments
  • property taxes
  • heating
  • 50% of condo fees (if applicable)

Total debt load

Your total debt load shouldn’t be more than 40% of your gross income. This includes your total monthly housing costs plus all of your other debts. This percentage is also known as the total debt service ratio.

Other debts may include the following:

  • credit card payments
  • car payments
  • lines of credit
  • student loans
  • child or spousal support payments
  • any other debts

Qualifying interest rates for mortgages

To qualify for a mortgage loan at a bank, you will need to pass a “stress test”. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract.

Credit unions and other lenders that are not federally regulated may choose to use this mortgage stress test. They are not required to do so.

The qualifying interest rate your bank will use for the stress test depends on whether or not you need to get mortgage loan insurance.

If you need mortgage loan insurance, the bank must use the higher interest rate of either:

If you don’t need mortgage loan insurance, the bank must use the higher interest rate of either:

For example, say you apply for a mortgage at a bank and that you have a down payment of 5% of the value of the home. You’ll need to get mortgage loan insurance since your down payment is less than 20%.

Assume that:

  • ​the interest rate you negotiate with your lender is 3.00%
  • ​the Bank of Canada’s conventional five-year mortgage rate is 5.14%

You'd need to qualify at the higher of the two interest rates, which is the Bank of Canada’s conventional five-year mortgage rate, even if you'll be paying the lower interest rate in your mortgage contract.

Calculate your gross debt service and total debt service ratios

Use the Mortgage Qualifier Tool​ to see if you can qualify for a mortgage based on your income and expenses.

The maximum amount you calculate may actually overestimate what you can really afford. Also think about the extra costs associated with buying a property, such as closing costs, mortgage loan insurance premiums, moving costs, unexpected expenses, maintenance costs and major home repairs.

Compare the result with the estimated costs for the home you'd like to buy. If the total costs you estimate are lower than the maximum amount you calculated, you’ll probably qualify for a mortgage with the lender.

If you find that your debt service ratios are too high, consider:

  • buying a home in a lower price range
  • saving for a larger down payment
  • reducing your debts

Table 1: How to calculate your maximum gross debt service and total debt service ratios
Steps Example Enter your information
Step 1: Find your annual gross income. If you're buying a home with a partner or someone else, combine your incomes to accurately reflect the household income. $54,000  
Step 2: Divide your annual gross income by 12 to get your gross monthly income. $54,000 / 12 = $4,500  
Step 3: Calculate your maximum gross debt service (32%). Multiply your gross monthly incomes from Step 2 by 0.32. (Write the gross debt service ratio as a decimal. For example, 32% = 0.32) $4,500 x 0.32 = $1,440  
Step 4: Calculate your maximum total debt service (40%) Multiply your gross monthly incomes from Step 2 by 0.4. (Write the total debt service ratio as a decimal. For example, 4% = 0.4) $4,500 x 0.4 = $1,800  

A lender may refuse to approve you for a mortgage

A lender could refuse you for a mortgage even if you've been pre-approved.

Before a lender will approve your loan, they'll want to verify that the property you want meets certain standards. These standards will vary from lender to lender.

Each lender sets their own lending guidelines and policies. A lender may refuse to grant you a mortgage because of your poor credit history. There may be other reasons. If you don’t get a mortgage, ask your lender about other options available to you.

Other options may include:

  • approving you for a lower mortgage amount
  • charging you a higher interest rate on the mortgage
  • requiring that you provide a large down payment
  • requiring that someone co-sign with you on the mortgage

Questions to ask when shopping for a mortgage

Compare the whole package offered by each lender.

Ask about:

  • the interest rate
  • the term
  • the amortization period
  • the fees you have to pay
  • your payment options
  • your prepayment options
  • ways you can save on interest
  • optional life, critical illness, disability and employment mortgage insurance
  • penalties if you sell your property before the end of your term
  • options if you want to pay your entire mortgage off early
  • transferring the remaining amount of your mortgage and the terms to a new property without paying a penalty if you sell your home
  • registering the mortgage with a standard or collateral charge

Negotiate your mortgage contract

Once a lender decides to lend you money, you’ll have to negotiate the terms and conditions of the mortgage, such as:

  • the amount
  • the amortization period
  • the term
  • how often you'll make payments
  • the interest rate
  • if it's an open or closed mortgage

Consider your options and choose a mortgage that is right for you.

Read your mortgage contract carefully and be sure to ask about anything you don't understand.

Federally regulated financial institutions, such as banks, must clearly give you key details about the loan agreement in an information box at the beginning of your contract.

Know your rights and responsibilities when getting a mortgage.

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