Securing a mortgage approval in Canada can be a pivotal step towards realizing your dream of owning a home. While the process may seem daunting, understanding the key factors that lenders consider can significantly increase your chances of success. Whether you’re a first-time homebuyer or a seasoned homeowner, as a Calgary Mortgage Broker, I put together this video that explains the three essential factors to keep in mind when applying for a mortgage in Canada.
1. Income: How You Will Pay the Mortgage
One of the most critical factors lenders assess is your income. A stable and sufficient income stream demonstrates your ability to repay the mortgage. Regular employment or self-employment income is typically preferred. Lenders will consider factors such as your employment history, the nature of your work, and the consistency of your income.
2. Credit Report and Score: Your other Debts and Obligations
A solid credit score is essential for mortgage approval in Canada. Aim to maintain a credit score above 650 to increase your chances of success. Lenders rely on your credit history to evaluate your financial responsibility and assess the risk of lending to you. Regularly review your credit report, pay bills on time, and keep credit card balances low to improve your creditworthiness.
3. Down Payment: Building Equity
Saving for a down payment is crucial when applying for a mortgage. For a primary residence, most lenders typically require a down payment ranging from 5% to 10% of the property’s purchase price. The higher the down payment, the lower your mortgage loan-to-value ratio, which opens up more opportunities when looking for a mortgage.
Other Considerations to Bolster Your Mortgage Approval Chances
a) Debt Service Ratios: Striking the Right Balance
Lenders consider two key debt service ratios: Gross Debt Service (GDS) and Total Debt Service (TDS). GDS represents the percentage of your gross income needed to cover housing costs, including mortgage payments, property taxes, and heating expenses. TDS accounts for all debt obligations, including housing costs, credit card payments, and other loans. Generally, lenders prefer GDS to be below 39% and TDS below 44%.
b) Stress Testing: Ensuring Affordability
In Canada, stress testing is a mandatory evaluation to determine your ability to manage higher interest rates or unforeseen financial challenges. Lenders will assess whether you can afford mortgage payments even if interest rates rise. This process helps protect borrowers from financial strain and ensures responsible lending practices.
c) Type of Property: Different Down Payment Requirements
The type of property you plan to purchase also impacts your down payment requirements. For example, investment properties often require a higher down payment, typically around 20%. Commercial properties may necessitate a down payment exceeding 25%, while raw land purchases might require a down payment of 30% or more. Understanding these variations will help you plan your finances accordingly.
Obtaining your Calgary mortgage approval is contingent upon several factors. Lenders scrutinize your income, credit score, and down payment, while also considering debt service ratios and stress testing for affordability. Familiarizing yourself with these criteria and maintaining a healthy financial profile will significantly improve your chances of securing a mortgage loan. By diligently addressing these factors, you can pave the way to homeownership and make your dreams a reality.