How to qualify for a mortgage in Canada?

mortgage in Canada

A mortgage can be a good way for people to start their new lives and purchase or build a home without incurring any major financial expenses that could put their short-term goals at risk. A mortgage ensures that you have ample money to purchase a home while retaining enough financial freedom so that your short-term expenses are not drastically affected. Today, we’ll be looking at how you can qualify for a mortgage in Canada to purchase your dream home and start by building a life together with your partner. Here’s all you need to know about mortgages in Canada and how you can qualify for one. 

However, with many different types of mortgages offered by financial and lending institutions, let’s look at those first and understand which might be the best for you to apply for. 

mortgage Canada

Mortgages: The Many Types

There are several types of mortgages that you can use to purchase your first home in Canada. Let’s look at them and understand what they all have to offer. 

  • Fixed-rate mortgage: The most common mortgage type in Canada. As the name implies, the interest rate for the mortgage is permanently set at a fixed rate, based on the term of the mortgage, usually 10 or more years. The fixed-rate mortgage is good for new borrowers and allows repayment stability and predictability. 
  • Variable rate mortgage: As opposed to fixed-rate mortgages, the variable rate type follows the fixed rate for a while within the mortgage term, after which it is governed by market conditions, fluctuating based on the prevailing interest rates. These are better, too, as the period during which the mortgage interest rate is fixed allows for lower premiums to be paid on top of the principal amount, and overall, you might end up paying less than a fixed-rate mortgage, depending on the prevailing interest rates. 
  • Open mortgage: Unless you are certain of stumbling onto a lot of money in the near future or are waiting on a big payout, the open mortgage isn’t a good option otherwise. In other mortgages, the fixed monthly premiums cannot be reduced by making one big payout; this is not the case in an open mortgage. Should you chance on some money, you can always pay off the mortgage, which can be handy and allow you to stave off the interest. 

These three are the most common types of mortgages in Canada and are readily available for people looking to finance the purchase of their first home. Now, let’s look at how you can qualify for a mortgage. 

How to qualify for a mortgage in Canada

To qualify for a mortgage in Canada, you must go through a few steps and demonstrate that you do not pose a fiscal risk to the lender or financial institution. Let us look at the steps that you need to go through. 

  • Show income reliability

The first and foremost factor determining your eligibility and qualifies you to secure a mortgage loan is your income and how reliable it gets. If you have a stable job, don’t switch too often, or have not had extended periods of unemployment, you are much more likely to get approved for a mortgage. To prove that you are employed and are earning a decent paycheck, you will need to provide the lender or the financial institution with the following things: recent pay stubs, employment letter, and tax return dating back to around two years. These will demonstrate to the bank that you can repay the amount and take on the mortgage for the foreseeable future. 

  • Compliance with GDS, TDS ratios

GDS stands for gross debt service, whereas TDS is total debt service, and these are both tools used by mortgage lenders and financial institutions to gauge the risk factor of a potential borrower. Based on your annual income, the GDS and TDS are supposed to show whether or not your finances are compliant with the Canada Mortgage and Housing Corporation (CMHC) guideline, which states that a household income percentage of no more than 39 per cent monthly should go towards housing and other related expenses. If your income and debt ratio falls below this threshold, the bank or lending institution will have no reason to reject your application for the mortgage.

  • Credit score requirements

Credit score is one of the more crucial things that need to be for you to secure a mortgage for your dream home. Qualification for a mortgage heavily depends on a credit score of at least 660 or more. This score category will keep you out of the range of predatory lenders, classified as C lenders or simply lenders who might not offer you a feasible interest rate. With a credit score of 660 or above, you will have yourself an A lender, which means better interest rates and an overall better mortgaging experience. You might have to settle for B or C lenders for lower scores. However, it is important to note here that if your credit score isn’t above 660 but is close to being at that threshold, you should always try and improve your credit score rather than settle for a B or C mortgage; this way, you can get the best possible mortgaging option.

While these govern the eligibility of your mortgage application, let’s now look at the documentation that might be required for securing a mortgage.

Documentation required for a mortgage in Canada

The requirements of certain documents can vary from lender to lender; however, the following documents are standard and are required by all financial institutions dealing with mortgages. 

  • Employment, income proof: Everything from pay stubs to tax returns can be used to validate your income, whereas, for employment, an employment letter from your manager will suffice and inform the lender that the person is indeed not a financial risk. 
  • Proof of down payment: Many mortgages will require you to put a down payment on the property that you intend to own, and for that, proof of down payment will be required. 
  • Documents of the property: For the final documentation, property documents like the real estate listing, sale agreement, and other relevant documents will also be required. 

mortgage

The bottom line

Securing and qualifying for a mortgage in Canada is not difficult, especially if you are financially prudent. For many, the issue lies with the credit score, which can be difficult to maintain or increase in certain conditions. However, that does not mean that you won’t be able to afford your dream home. With a little effort and financial planning, you, too, can qualify for a mortgage and acquire your dream home, starting a life you have always wanted for yourself. 

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