The process of becoming a homeowner can be daunting. From choosing the right place to call home to saving up enough for a down payment, there are many steps that can leave new homeowners scratching their heads. When it comes to getting you your first home, the mortgage is one of the most important steps in the process. Unfortunately, this step can also be one of the most confusing for some. By having your finances in order and being smart about your mortgage, you can make this step much easier for yourself! We’re here to help with our list of tips on how to get approved for a mortgage.
1. Check your credit score before getting approved for a mortgage
Your credit score is super important when it comes to mortgage approval. In Canada, a credit score runs from 300 to 900 across five different categories. These are Poor, Fair, Good, Very Good and Excellent. Depending on which credit bureau you are using, these categories may vary. However, the process is essentially the same. Your credit score is basically a rundown of your current financial situation, so knowing you have a good score and knowing what it is is crucial. This is because mortgage lenders will use your score to determine how likely you are to repay your debt to them. The higher your credit score, the more likely you’ll be offered some of the lower mortgage rates in Canada. The recommended sweet spot is roughly around 680 (at a minimum), but the higher the better.
In addition to your overall score, your credit report will also tell you information about any late payments, your overall debt levels and the length of your credit history. So, remember to make those loan and bill payments on time to leave yourself with a desirable credit score! If you are curious as to what your credit score is, you can check for free using one of Canada’s two credit bureaus, Equifax or TransUnion.
2. Get a mortgage pre-approval
In most cases, a mortgage pre-approval is seen as the first step in a mortgage application. When applying, a lender will assess your credit card report and overall financial situation to determine the amount and the rate that you qualify for. Once you receive a pre-approval, the lender will lock-in your rate and give you a time period of 60-130 days to hunt for your dream home.
When you have a mortgage pre-approval, you can search for homes within a specific price range. This is because you already know what you can and cannot afford. When you finally find your dream place, your mortgage approval will be completed at a faster rate. With this being said, it is important to keep in mind that a mortgage pre-approval does not guarantee a mortgage approval. In some situations, a property appraisal, the type of property or the location itself can affect your situation.
3. Have your documents prepared to get approved for a mortgage
Before you apply for your mortgage, you should always have the necessary documents ready. Though these may vary based on the lender you choose to work with, having them prepared can shorten an already-long process! Some of the documents that may be requested include:
- Identification documents
- Proof of a down payment
- Proof of income (bank statements, pay stubs, etc.)
- Information regarding outstanding debts (student loans, car loans, credit cards, etc.)
- Information regarding financial obligations (spousal support, child support, etc.)
- Proof of employment (letter of employment, pay stubs, etc.)
It’s always important to contact your lender beforehand in order to figure out the documents they will require to process your mortgage application. This is because not having one can cause a massive delay (or even a cancellation) when it comes to your application. This can be costly, especially if you have already put in an offer on the house. Your deposit will generally serve as part of your down payment. If you are unable to proceed with the sale due to not having the required documents, you may end up losing out on the house and your deposit!
4. Shop around for the best rates
Finding a great rate is like hitting the jackpot when it comes to your mortgage. A good rate is generally seen as the outcome of your mortgage application, but it can go either way. By using a mortgage broker or shopping around, you’ll often discover lenders who are offering lower rates than the competition. Simply put, when you find a better mortgage rate, your monthly payments will be lower. Of course, this will make it easier for you to pay off your mortgage. This will result in a higher chance of you being approved for the mortgage and allow yourself to borrow more. To begin this process, simply research what the best current mortgage rates are across the province. Generally, this is free of charge and done through a mortgage broker.
5. Save for a larger down payment
Buying a home will always require some amount of cash up front. Known as a down payment, this is quite possibly one of the most difficult steps when buying a house. It is also one of the most crucial. This is because the bigger your down payment is, the better. The larger your down payment is up front, the less money you will need to borrow in the long run.
The minimum down payment for a mortgage approval will differ based on the homes price:
- $500,000 or less: 5% of the purchase price
- $500,000 to $999,999: 5% of the first $500,000 of the purchase price, as well as 10% for the portion of the price above $500,000
- $1 million or more: 20% of the purchase price
Essentially, you’ll want to save up as much as you can for a down payment. At isure, we understand this can be difficult considering the constant rise in prices of homes within Ontario. This is especially true when it comes to cities, such as Toronto. Luckily, isure has few tips for you when it comes to saving for a down payment.
6. Keep a stable income to get approved for a mortgage
We understand that if you’re looking to purchase a house, you probably don’t plan on quitting your job anytime soon. However, we believe it is crucial to reiterate the importance of your proof-of-income. If you don’t have proof that you can make your payments, you most likely will not get approved for a mortgage. Luckily, most full-time jobs are a good way of proving you make an income and can pay off your mortgage. In many situations, the longer you have been with a specific employer or company, the better chance you have at getting accepted. If you are applying for a mortgage with a partner, it is ideal that both of you have a source of income.
7. Eliminate your debts
When you take on a mortgage, you are essentially taking on long-term debt. This means you will most likely want to minimize any existing debt you may have. Credit card debt, student loans and other forms of debt can get in the way from you making your mortgage payments. It is always best to get them out of the way so that you can focus on paying off your mortgage for the time being. As mentioned above, having outstanding debt can also make it more difficult for you to be approved for a mortgage in the first place. This is due to lenders looking at your debt-to-income ratio when considering if you are reliable to lend to.
Remember, the process of being approved for a mortgage is never easy. However, when you finally get settled into your dream home, you’ll realize the process is very much worth it. If you are a first time homeowner, or an experienced one looking for new insurance, contact us or request a quote today!
