Qualifying for a mortgage

Qualifying for a Mortgage in Canada: Your Guide to Homeownership

Owning a home is a significant milestone for many Canadians, but navigating the mortgage qualification process can seem daunting. Whether you're a first-time homebuyer or looking to upgrade, understanding the basics of mortgage eligibility in Canada is crucial. Here’s a comprehensive guide to help you through the process.

1. Income and Employment Stability

One of the primary factors lenders consider is your income. They want to ensure you have a stable source of income to make mortgage payments. Typically, lenders look at your employment history and may require proof of steady income for at least two years. If you're self-employed, demonstrating consistent earnings and business stability becomes crucial.

2. Credit Score

Your credit score plays a pivotal role in mortgage approval. In Canada, credit scores range from 300 to 900, with higher scores indicating better creditworthiness. Lenders use this score to assess your ability to manage debt responsibly. A score above 650 is generally considered good, but aiming for 700 or higher increases your chances of securing better mortgage rates.

3. Down Payment

While the minimum down payment required in Canada is 5% of the purchase price for homes valued up to $500,000, having a larger down payment (20% or more) can provide several advantages. It reduces your mortgage amount, lowers monthly payments, and can eliminate the need for mortgage insurance, which is mandatory for down payments less than 20%.

4. Debt-to-Income Ratio

Lenders calculate your debt-to-income (DTI) ratio to assess your ability to manage additional debt. This ratio compares your monthly debt payments to your gross monthly income. Ideally, your DTI should be below 43% to qualify for a mortgage, though specific thresholds may vary between lenders.

5. Employment and Down Payment Source Verification

Lenders scrutinize your employment status and down payment source to mitigate risks. They verify employment details and the origin of your down payment to ensure it’s not borrowed, as borrowed funds can affect your eligibility. Transparency and documentation are key here.

6. Mortgage Stress Test

Introduced in 2018, the mortgage stress test ensures you can afford payments if interest rates rise. It requires you to qualify at a higher rate than your actual mortgage rate, ensuring financial stability in changing economic conditions.

7. Mortgage Options

Canada offers various mortgage options, including fixed-rate and variable-rate mortgages, each with its pros and cons. Fixed-rate mortgages offer stability with predictable payments, while variable-rate mortgages fluctuate with market conditions but may offer lower initial rates.

Navigating the mortgage qualification process in Canada involves careful planning, financial discipline, and understanding your options. By ensuring a strong credit score, stable income, adequate down payment, and manageable debt levels, you enhance your chances of securing a mortgage that suits your needs. Consulting with a mortgage broker or financial advisor can provide personalized guidance tailored to your financial situation, ultimately helping you achieve your dream of homeownership with confidence.

The best way to build or repair your credit score

Building or reestablishing your credit can be tricky. Bruised credit takes a while to reestablish and no credit history can be even worse. Either way, you need credit for almost everything you do from getting a credit card, to obtaining a car loan or even just renting an apartment.

If you are one of the many who have no credit there are options for you. First step would be to research credit cards that will issue credit without a credit history. There are a few Canadian credit cards that do just that! If you can’t find one, give me a call. Another option is to apply for a secured credit card. These cards require a cash deposit. Once you receive a credit card it it is extremely important to use it properly to build your credit. If you receive a limit of $500 you should not go over 50% of the limit ($250). Use it regularly for everyday items that you already have the funds to pay for and pay it off every month. You will see your credit score soar! Another credit building option is obtaining a small loan or line of credit with a co-signer. Instalment payments/revolving payments, even on small loans, are a great way to establish credit. 

If you have bruised credit as a result of missed payments it is important to chip away at any high interest credit card balances that are over 50% of the limit. As the balance drops your credit score rises. If you have collections showing on your credit…GET THEM PAID!! Once they are paid then the clock starts ticking for them to fall off your bureau. If you can pay off those credit cards…cut up them up so you aren’t tempted to use them on things you can’t afford but do not call the credit card company and close your account. Even if you aren’t using them, they are still building your credit.

Whatever your circumstance is, having a credit card helps your credit, if used properly. Just remember to keep the utilization low, pay the bill at minimum 2 days prior to the due date and don’t close them off.