What Do Lenders Look at When Approving You for a Mortgage?
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Whether you are buying a new home or already an experienced homeowner looking to refinance, lenders look at a multitude of factors when approving you for a new mortgage.
Recent data shows that 410,000 new mortgages originated in the second quarter of 2021 alone, which is a 60% increase compared to the same period the year prior1. This isn’t surprising as home prices have gone up substantially over the last two years.
The Canadian Association of Accredited Mortgage Professionals (CAAMP) also notes that the average homebuyer finances roughly 67% of their purchase price2. If you are looking to buy a new home or refinance to take advantage of the low-rate environment, here are a few factors your lender will be sure to analyze.
Credit Score
One of the first things that lenders look for when qualifying you for a new mortgage is your credit score. Credit data is pulled from the two Canadian credit repositories, namely Equifax Canada and TransUnion.
Scores often range between 300-900, with the lower representing poorer credit and the top end representing someone with excellent credit3. Requirements vary from lender to lender but, in general, most lenders require a credit score at or above 6503.
You can request a free copy of your credit report each year. The types of credit, payment history, credit utilization, and new inquiries all go into determining your overall credit score.
Outstanding Debt and Payment History
Lenders will review your outstanding debts and payment history to help determine your likelihood and ability to repay new credit requests.
While your payment history is already considered, in part, by your credit score, lenders will still review any outstanding balances you carry and their relation to your income to make sure you can support taking on new debt.
Ideally, you want to have no late or delinquent tradelines, especially on current or previous mortgages. However, the existence of these factors may not necessarily outright disqualify you from obtaining a new mortgage, so long as blemishes can be sufficiently explained and documented. If you can demonstrate you are a responsible borrower that can manage credit, you could still get approved for a new mortgage.
Qualifying Income
The amount of money you earn is a major factor that lenders analyze when approving you for a mortgage. Not only do they need to verify how much you earn but also the stability of your income and its likelihood of continuance.
For example, a full-time salaried borrower may have less hoops to jump through than self-employed borrowers or those relying on variable sources of income for qualification.
Lenders will typically want to see that you have a two-year history of receiving any income being used for qualification substantiated by supporting documentation such as recent paystubs, T4 statements, and/or personal T1 generals4.
Liquid and Non-Liquid Assets
Most lenders will want an itemized summary of your assets to review as part of your mortgage application4. This includes liquid assets such as checking and savings accounts but could also include non-liquid assets such as registered retirement savings plans (RRSPs) and vehicles.
Borrowers with substantial assets are often considered more responsible borrowers in the eyes of lenders because you have access to additional reserves should an unexpected event occur, that could temporarily impact your income used to make your monthly payments.
Down Payment
If you are buying a new home, lenders will want to know how much of your own money you are contributing to your purchase transaction. Putting down more money is more favorable than putting down less money because it reduces the overall risk to the lender.
If your down payment is coming from a typical bank account, lenders will often want to see a 90-day history showing the source of funds being used.
Other down payment sources, such as the net equity from the sale of another property should be documented with a fully executed purchase agreement and a mortgage statement for any existing mortgage loan secured by the property.
Gifted funds may also be an eligible source of down payment provided you have a signed gift letter and proof the funds have been received into your bank account from the donor.
Property Condition and Value
Lastly, lenders will need to analyze the condition and value of the subject property that will be used as collateral to secure your new mortgage loan.
Your lender may require an appraisal inspection report be completed before approving your credit request to make sure the value supports your requested loan amount. It also helps the lender identify any issues related to the property’s condition.
In some cases, you may find a lender who will approve a mortgage based on an automated valuation model (AVM) to determine your home’s property value, but it’s never a guarantee.
Sources
1 Evans, P. (2021, September 05). Canadians have record-high mortgage debt. What happens when rates rise? | CBC News. Retrieved November 15, 2021, from https://www.cbc.ca/news/business/debt-mortgage-feature-1.6162668
2 Dunning, W. (2015, June). A Profile of Home Buying in Canada (Rep.). Retrieved November 15, 2021, from Canadian Association of Accredited Mortgage Professionals website: https://mortgageproscan.ca/docs/default-source/default-document-library/a-profile-of-home-buying-in-canada.pdf?sfvrsn=e54ef47e_0
3 Logan, H. (2021, August 18). Minimum Credit Score for a Mortgage in Canada. Retrieved November 15, 2021, from https://www.nerdwallet.com/ca/mortgages/minimum-credit-score-for-mortgage-canada
4 Cooper, S. (2021, October 21). Mortgages 101: Guide to Getting Your Mortgage. Retrieved November 15, 2021, from https://www.greedyrates.ca/blog/mortgages-101-a-guide-to-getting-your-mortgage/