A home is the biggest purchase most people will ever make.
For that reason, banks and other lenders do their homework before they agree to a mortgage loan worth hundreds of thousands of dollars.
They want to make sure you’re the type of person who’s willing and able to pay it back.
But they won’t ask for anything surprising.
A lender will want to know what assets you currently hold, what your income is and the sources of it, what kind of debts you owe, and how you’ve handled debt in the past.
The documents that prove these things are easy to find.
Read on for the full list, so you can be prepared when you meet with your mortgage representative.
Preparing to Get a Mortgage
Employment History and Income
The mortgage lender will want to see exactly what your income is and how it is derived, currently and also for the past 2 years.
For employed individuals, these details can be provided in the form of pay stubs, employment letters as well as tax returns.
There’s no set amount you need to earn per year to qualify for a mortgage, however the amount of mortgage you’ll qualify for is dependent on your income.
Having a steady job is a major leg up when applying.
If you’re self-employed, the lender will probably ask you for more documents, like your last two tax returns.
A mortgage lender will want to know how much money you owe and when you expect to pay it off.
Remember: a mortgage will put you into debt for a long time.
If you’re already being chased by creditors, that could put off another lender.
The lender will want to know two things: your GDS ratio and your TDS ratio.
Your gross debt service (GDS) ratio is the amount you spend on your current housing situation, compared to how much money you make.
The Canada Mortgage and Housing Corporation (CMHC) calculates that number by adding together your current mortgage payments, utility bills, insurance, and property taxes, and dividing that number by your income.
Your total debt service (TDS) ratio includes those costs, but takes into account all your other debts, including credit card bills, auto leases, student loans, and more.
Did You Know?
If you’re insuring your mortgage (less than 20% down) with CMHC, your GDS must not exceed 39%, and your TDS must not exceed 44%.
Lenders will pull your credit report from either Transunion or Equifax and sometimes both.
A credit report lays out a lot of your financial history, including your credit cards, leases, loans and even things like child support payments.
It’ll also include your credit score — a number that corresponds to the risk the lender takes when they give you a loan.
Here’s how Transunion rates credit scores:
- 300 to 600: Very poor
- 601 to 658: Poor
- 658 to 720: Fair
- 720 to 781: Good
- 781 to 850: Excellent
If you have a poor credit score, lenders might deny your application outright, charge a higher interest rate, require mortgage insurance, or require someone to co-sign the application in case you default.
It’s a good idea to pull your own credit report ahead of time to ensure everything is accurate as well as being aware of what your score is.
The lender will ask for documentation outlining what assets you have, in addition to how much you make.
The lender will subtract your debts from your assets to calculate your total net worth, which also factors into how likely you are to be approved.
Examples of assets include:
- Funds in chequing/savings accounts and TFSAs
- Other property you own
- Money owed to you and more
Remember to get all of the above documents together and organized neatly, so when the lender asks for them, you’re prepared.
You’ll also need to make sure your taxes are up to date — nothing sends a red flag to a financial institution like unpaid taxes.
You should have on hand your notice of assessment for the past 2 years, which basically outlines that you’ve completed your taxes for the corresponding year.
Steps to Get a Mortgage
A preapproval is a commitment from a lender that they will advance you a mortgage based on certain conditions being met, typically with a rate hold of up to 120 days.
Getting pre-approved for a mortgage will let you put in an offer on that gorgeous farmhouse loft you’ve been drooling over while “working” from home.
Many lenders offer online tools to let you know what size mortgage you qualify for.
These tools can also estimate your monthly payments and potentially let you lock in an interest rate for a certain period of time.
It’s best to shop around to see which lenders can offer you the best rates.
Look at what your monthly payments would be from a variety of lenders, for a variety of different home prices.
Also think about the pros and cons of fixed versus variable interest rates, and longer or shorter time frames.
2. Look at Homes and Make an Offer
You’ve probably already sunk countless hours on the MLS — but now’s the time to get real.
Once you’ve figured out what kind of mortgage you can get, and what you can afford, it’s time to check out homes that fit your price points.
Once you’ve been preapproved for a mortgage, you can talk to your real estate agent, get all your ducks in a row, and, when you’re ready, put in an offer.
3. Finalize Your Mortgage
Now, you’ll finalize your mortgage and lock in your mortgage interest rate, your term, and amortization period.
You’ll do this with your mortgage representative, who will help guide you through the process. Remember all that research from earlier? Now’s the time to put it to use.
4. Buy Mortgage Insurance (Optional)
If you put down a deposit of less than 20%, in Canada you’re legally required to purchase mortgage default insurance.
This protects the lender in case you can no longer make your payments.
Banks may also require you to buy insurance if they deem you a higher-risk borrower — such as if you’re self-employed, new to Canada, or have less-than-sparkling credit.
5. Close on the home
There might be a lot of waiting — and there will definitely be a lot of sweat when you decide to make it official.
In preparing to close on your new home, there are some additional costs to be aware of.
6. Move In
Congratulations — you just bought a house! And more importantly, you did it responsibly.
Now you can enjoy the fruits of your labour inside your brand new home for years to come.
Frequently Asked Questions
- How long do I need to be employed to get a mortgage in Canada?
If you’ve been working for two years and meet the other basic financial requirements, you can qualify for most mortgages.
If you’ve been working for less than two years in Canada, banks might ask you for more documentation, like tax returns for prior years.
- Can I get a mortgage without a job if I have savings?
Majority of lenders will not consider your application if you do not have a steady income, however if you have a large amount of savings there are lenders that may be willing to work with you.
Mortgage lenders are legally required to make sure Canadians pass the mortgage “stress test” to see if they’ll be able to make their payments, even if something bad happens to their finances.
If you have enough savings that a bank wouldn’t be worried about you making payments for a long time, there’s a chance you could still be approved.