Anticipation and apprehension go together in buying a property in Canada
Planning to buy a house and shopping for a mortgage in Canada can be both exciting and stressful at the same time. The stress drivers are skyrocketing house prices and the fear of not getting a mortgage because of the new rules.
Many prospective home buyers and newcomer entrepreneurs get last-minute surprises in their mortgage loan application and they end up either losing the deal or get stuck with a high-interest mortgage or exorbitant private lender.
Here are the 9 most important things you should take care of before applying for a mortgage to buy a house in Canada:
Your mortgage approval checklist
Here are the things you must put in place, preferably 30-60 days before you submit your application for a mortgage to buy a house.
1. Full -time job and stable income
While you are applying for a mortgage, it’s important to keep your full-time day job. Mortgage providers won’t approve your mortgage without proof of steady income.
If you are employed on a casual basis, it might be worth looking for a permanent role for the duration of your mortgage application, even if it’s just part-time. Getting a great mortgage with a low rate can save you tens of thousands of dollars, so it could be worth finding some more stable employment while you finish your application.
If you are self-employed, things can get a little more tricky. You would be required to provide details on your business and income for several years A licensed mortgage broker can help you prepare the best possible application.
2. Check your credit score and avoid surprises
Your credit score is a snapshot of your overall financial health, so it’s important that you put it in shape well in advance.
Ideally, you want your score to be at least 660, but higher is always better. In addition to your overall numerical score, your credit report will also contain information about late payments, your overall debt levels, and the length of your credit history.
Since credit history and scores are not fixed overnight. It makes sense to take care of this well in advance.
3. Have your down payment ready
Buying a home will always require a down payment. The bigger your down payment is the less you will need to borrow, and the lesser your interest.
In Canada, 20% or more as down payment is ideal. A down payment of less than 20% of the home’s purchase price requires the buyer to buy mortgage loan insurance. Paying these insurance premiums will increase your monthly mortgage payment.
Overall, you want to save up as much as you can for your down payment. Of course, that’s easier said than done especially in hot property markets like Ontario and Vancouver BC.
4. Pay down existing debt
Taking on a mortgage means taking on some long-term debt, so you should minimize your existing debt.
Fewer debts paint a better picture and also helps you maintain a good debt-to-income ratio
Your balances across your credit cards, lines of credit, or student loans don’t necessarily need to be at $0. But they shouldn’t be too high.
5. Pay off CRA tax and debt collections
Paying off any outstanding CRA tax is none-negotiable. The banks must see evidence of full payment before they even begin processing your application
You should also pay off any items you have in collection. You shouldn’t have been there in the first place. So paying them all off ahead of time will help your case.
6. Put your spending on hold
Minimize your spending as much as possible and absolutely avoid any big-ticket items.
This is not the time to buy a car or furniture or any high-priced item on credit. The new debt may eat into your debt to income ratio and it will also impact your credit scores.
You can resume your shopping spree after securing your mortgage approval.
7. Organize your assets
You are typically asked to provide your last three months of bank statements to show the lender a pattern of saving or evidence of your financial assets.
To make life easier, it could be prudent to deposit all the necessary funds in one specific account more than three months before application. That way the money will be seasoned and there won’t be the need for explanation letters if money is constantly going in and out of the account.
8. Watch out for any red flags
Asset issues are often red flags for loan underwriters. They hate to see the money that was just deposited into your account.
This will show that it’s your money and not a gift or a loan from someone else since it wouldn’t technically be your money.
9. Always mind your DTI
The “debt-to-income ratio” or “DTI ratio” as it’s known in the mortgage industry, is the way a bank or lender determines what you can afford.
The maximum debt-to-income ratio will vary by mortgage lender, loan program, and investor, but the number generally ranges between 40-50%
The biggest 3 factors in getting a mortgage
- What you own- your assets
- What you earn- your income
- What you owe- your level of debt
Shahab Shahisavandi, mortgage expert and broker at 8mortgages and Dominion Lending Centers (DLC) said “these are the biggest three factors and a mortgage agent is best positioned to guide you through.
What happens if your mortgage application is declined?
A lender could still refuse to give you a mortgage despite all your efforts and submitted documents. The lenders each sets their own lending guidelines and policies. Here are some other options the lenders might offer you
- Approve you for a lower mortgage amount
- Charge you a higher interest rate on the mortgage
- Require that you provide a larger down payment
- Request that someone co-sign with you on the mortgage
- Point you to an alternative B lender
- As a last desperate resort, you can also get a private lender. But this last option should be avoided by all means.