How to Get Approved for a Mortgage in Canada
What You Should Know
- Lenders assess your income, credit score, and down payment to approve you for a mortgage.
- You must prove income stability and meet debt service ratio thresholds.
- Your credit score must exceed 600.
- Your down payment can be as low as 5% to 10%.
- There are different options, such as private mortgage lenders if you can't meet these criteria.
There are three criteria lenders look at when approving your application:
- Income,
- Credit Score, and
- Down Payment Percentage
If you're unsure where you stand in any of these categories, it's good to get a pre-approval from a lender before starting the application process. Pre-approval has the added benefit of being able to lock in your mortgage rate and be immune to potential rises in mortgage rates over the lock (hold) period. That way, you can identify and fix any issues that may be holding you back. This article will dive into each of the criteria to help you understand how to get approved for a mortgage in Canada. It will discuss the different types of lenders and the process of receiving a mortgage.
| Income | Credit Score | Down Payment | |
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Income Requirements
The biggest hurdle to getting approved for a mortgage is income for most people. Lenders want to see that you will be able to have stable and adequate income to make monthly mortgage payments consistently. Part of the reason why mortgage approvals in 2023 were down to 2000 levels was fewer home sales. This was due to a large bid-ask gap, which means that bidders were bidding based on how much mortgage they could get based on their income, which did not meet the sellers’ expectations. Lenders look at a few documents to qualify you for a mortgage to determine this.
Source of Income
The first thing lenders will look at is your source of income. They'll want to see a few months of pay stubs to verify your employment status and income if you're employed. They may even ask for a letter of employment.
If you're self-employed or a business owner, you'll still be able to receive a self-employed mortgage. However, you will need to show business tax returns from the previous two years. Lenders see self-employed applicants as riskier than employees and may charge a slightly higher interest rate.
Having "Enough" Income
Next, lenders want to see what percentage of your income goes towards home-related and additional debt payments. They calculate this using the gross and total debt service ratios.
Gross debt service (GDS) only focuses on predictable home-related expenses from your future home. This includes things such as mortgage payments, property taxes, and utilities. Mortgage professionals commonly abbreviate this to PITH, which stands for
- Mortgage principal and interest (PI)
- Property taxes (T)
- Heating and utilities (H)
Lenders want to ensure that no more than 39% of your income is spent on PITH. Although, a lower ratio will increase your chances of getting a mortgage. If GDS prevents you from qualifying for a mortgage, there are two general solutions, increase your income or reduce your PITH. A quick way to increase your income is by combining through a joint mortgage. You can decrease your PITH by looking for a cheaper home, increasing your down payment, getting a better mortgage interest rate, or home shopping in areas with lower property taxes.
The other ratio lenders calculate is the total debt service ratio (TDS). This shows the percentage of your income going towards your future PITH and additional debt payments not related to your property. For example, it includes student debt payments, auto loans, or credit cards. As you could imagine, TDS has a higher limit than GDS to make up for the additional inclusions. According to CMHC mortgage rules, your total debt service ratio can't exceed 44%. No more than 44% of your income can be directed to PITH and other debt obligations to qualify for a mortgage.
If your TDS is preventing you from qualifying for a mortgage, you can use the same strategies as GDS and more. The best approach is to either pay off high-interest debt or consolidate it into a low-interest loan. This will allow you to reduce monthly debt payments through a lower interest rate. Although, it's wise to talk with a mortgage broker or financial advisor before pursuing this strategy.
Stress Testing
The mortgage stress test was introduced in January 2018 to ensure borrowers could still afford their mortgages if interest rates increased. Stress testing hypothetically increases your mortgage interest rate to see if you can still meet GDS and TDS limits. A higher interest rate will increase your monthly mortgage payments, resulting in a higher percentage of your income going towards PITH.
You must prove you can afford the higher of two mortgage payments. The first is your approved rate plus 2%. The second is the Bank of Canada's 5-year benchmark rate, which is currently 5.25%. If the stress test limits you from receiving a mortgage, you'll need to decrease your mortgage size or increase your income.
Credit Requirements
Lenders also consider your credit score when evaluating your application. A high credit score indicates to lenders that you're a low-risk borrower likely to make mortgage payments on time. The higher your score, the more chance you get approved for a mortgage, and the lower your interest rate will be.
A recent Equifax report showed that the average Canadian has a credit score of 753. However, a credit score can range from 300 to 900. Anything below 600 is not considered creditworthy, while anything above 760 is excellent. If your credit score is on the lower end, there are still ways to get a mortgage through a private mortgage lender. However, it’s best to increase your score to avoid paying a high interest rate.
Some methods include paying your bills on time, maintaining a low credit utilization ratio, and diversifying your credit mix. You can also become an authorized user on someone else's credit card or take out a small loan and repay it on time. These methods won't work overnight, but they'll slowly help improve your score over time.
Down Payment Requirements
The third factor lenders consider is your down payment amount. A down payment is the portion of the home's purchase price that you're responsible for paying upfront. The larger your down payment, the smaller your mortgage will be, and the less you'll need to finance. Larger down payments will reduce your monthly mortgage payment, which will even help you meet debt service ratios. Larger down payments will also decrease the amount of interest paid throughout your mortgage. However, the type of property you want to buy has the most significant impact on your minimum down payment.
| Type of Property | Minimum Down Payment |
|---|---|
| Primary Residence | 5% to 10% |
| Secondary Residence | 5% to 10% |
| Investment Property | 20% |
| Commercial Property | 25% |
| Raw Land | 30% |
Down Payment for Primary Residence
If you're buying a primary home, your down payment can be as low as 5%. However, any down payment below 20% will need CMHC insurance, which protects the lender in case you default on your mortgage. This insurance is an additional cost that's usually rolled into your mortgage. If you have a down payment of 20% or more, you won't be required to purchase CMHC insurance.
If you're having a challenge meeting down payment requirements for a primary residence, you may qualify for down payment assistance programs (DPAPs). There are federal options such as the first-time homebuyers incentive and municipal programs. In most cases, DPAPs work as a shared equity mortgage. For example, the government provides you with a loan, but they share in your property appreciation. If your property goes up in value, so will the loan amount you owe. Typically the loans must be paid back within 15 years. However, DPAPs are not eligible for secondary residences, which are explained in more detail in the following paragraph.
Down Payment for Secondary Residence
The government considers a secondary residence a property that won't be your primary living place. This can include vacation homes and other non-investment properties. The down payment for your secondary residence can also be as low as 5% to get a mortgage. While you won't be eligible for DPAPs, you can use your primary home to fund the down payment of your second home. For example, you can cash out refinance your primary residence and use the proceeds for your secondary home down payment. However, you'll need to ensure you remain within debt service ratio requirements.
Down Payment for Investment Property
An investment property is defined as a property you intend to generate rental income from. The minimum down payment for an investment property mortgage is usually 20%. However, if you live in one unit of your rental property, it is considered a primary residence, and you can get a mortgage with a minimum 5% down payment.
Down Payment for Commercial Property
If you want to get a commercial mortgage, you'll need a down payment larger than 25%. It's similar to an investment property mortgage but is for buildings containing more than four units or non-residential property. The interest rates for commercial mortgages also tend to be higher than investment property mortgages. Additionally, there are net worth requirements.
Down Payment for Raw Land
Buying raw land is the riskiest real estate investment. It is difficult to sell, meaning it's more dangerous to lenders. As a result, you'll likely need a minimum down payment of 30%. Land acquisition loans also have the highest interest rate out of the four types of properties mentioned in this section.
Getting Approved by Different Types of Mortgage Lenders
There are three categories of mortgage lenders in Canada; A-lenders, credit unions, and private money lenders. While A-lenders, such as Scotiabank are selective with lending applicants, they may not always provide the best mortgage rate. Continue reading to understand the different lending options and how to get approved by them.
| A- Lenders | Credit Unions | Private Mortgage Lenders | |
|---|---|---|---|
| Mortgage Interest Rate | Moderate | Best | Highest |
| Lending Requirements | Least Flexible | Flexible | Most Flexible |
A-Lenders
These are the big six banks in Canada. They're known as A-lenders because they're the safest and most secure type of lender. As a result, they have the most stringent eligibility requirements. To qualify for an A-lender, you'll likely need a credit score of 680 or higher. In addition, you'll need to prove steady employment.
B-Lenders
Credit unions are classified as B-lenders. They offer more flexible lending criteria than A-lenders, making them a good option if you don't qualify for an A-lender. To get approved by a credit union, you'll likely need a credit score of 600 or higher. However, credit unions are less regulated so can adjust mortgage lending criteria if necessary.
Interestingly, credit unions typically provide better interest rates and customer service than banks. This is because they operate on a non-profit basis. However, credit unions often don't have the broad selection of A-lenders' products. For example, your local credit union likely won't offer travel credit cards and many types of insurance.
C-Lenders
Private mortgage lenders are usually classified as C-lenders. They're the most flexible lender, making them a good option if you don't qualify for an A or B-lender. To get approved by a private money lender, you'll likely need a credit score of 550 or higher. However, these have the highest interest rates to make up for riskier clients. A private money lender is best used to buy a home before renewing your mortgage to a lower interest rate lender.
How the Mortgage Approval Process Works
The previous two sections explained the criteria lenders look at and different lending options. You should now understand your limiting factors and which type of lender has the highest chance of approving you. Review the primary section explaining tactics to meet income, credit score, and down payment requirements, if you don't meet lending criteria. The next step is to get mortgage funding, which can be done in three steps.
Step One: Discovery Call
The first step is to apply for a mortgage online or have an initial conversation with a mortgage broker. They will ask you basic questions about your income and job. Additionally, you will better understand their interest rates and mortgage lending options.
Step Two: Mortgage Pre-Approval
If you are happy with the lending rates offered through your discovery call, you can advance to a pre-approval. This is a detailed document and credit score review but is not a guaranteed mortgage. Most real estate agents want to see you have been pre-approved for a mortgage before working with you. While you can receive numerous pre-approvals, each different application will negatively impact your credit score.
Step Three: Receive Mortgage Funding
The last step is to receive mortgage funding. This only happens once you have an accepted offer on a home. Your lender will complete a final review of your financial situation and eligibility. If approved, they will fund your mortgage, and you'll be able to move into your new home!
The Bottom Line
Applying and getting approved for a mortgage in Canada is a process. Ensuring you get approved begins with understanding that lenders assess you through your income, credit score, down payment, and collateral. From there, it's essential to understand what is getting in your way and make a plan to fix it. There are many different types of mortgage lenders that may approve you. You may also want to simplify your finances by keeping everything in one place. In this scenario, you’d want to consider the best banks in Canada. Overall, have a realistic expectation of what you can afford and be patient as you work through the application process.
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
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- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.