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 for getting approved for a mortgage.
How Your Credit Score Affects Mortgage Approval in Canada
Your credit score is super important for 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 680 (at a minimum), with higher being 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 maintain a desirable credit score! If you are curious about your credit score, you can check it for free using one of Canada’s two credit bureaus, Equifax or TransUnion.
Mortgage Pre-Approval Tips for First-Time Homebuyers in Ontario
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 report and overall financial situation to determine the amount and rate you qualify for. Once you receive a pre-approval, the lender will lock in your rate and give you a 60-130 day window 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. That said, it is important to keep in mind that a mortgage pre-approval does not guarantee mortgage approval. In some situations, a property appraisal, the type of property or the location itself can affect your situation.
How to Prepare Financial Documents for Your Mortgage Application
Before you apply for your mortgage, you should always have the necessary documents ready. Though these may vary by lender, 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 to determine the documents they will require to process your mortgage application. This is because not having one can cause a significant delay (or even a cancellation) in 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 because you do not have the required documents, you may end up losing the house and your deposit!
Mortgage Rates: Shop Around
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 increase your chances of being approved for the mortgage and allow you to borrow more. To begin this process, simply research the current best mortgage rates across the province. Generally, this is free of charge and done through a mortgage broker.
First-Time Home Buyer Programs in Canada You Should Know About
If you’re buying your first home, there are several Canadian programs designed to make homeownership more accessible. These may include incentives that reduce your borrowing costs, allow you to use RRSP savings toward your down payment, or provide rebates on land transfer taxes. Taking advantage of these programs can lower your upfront expenses and improve affordability, which can positively impact your mortgage application. Additionally, it is worth researching which programs you qualify for or speaking with a mortgage professional who can guide you through your options.
How a Larger Down Payment Improves Mortgage Approval
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, 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 home’s 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, given the constant rise in home prices in Ontario. This is especially true in cities such as Toronto. Luckily, isure has a few tips for you on saving for a down payment.
Why Employment Stability Matters for Mortgage Approval
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 of getting accepted. If you are applying for a mortgage with a partner, it is ideal that both of you have a source of income.
Once you begin the mortgage approval process, it’s important to keep your finances as stable as possible. Even small changes can raise red flags for lenders. Until your mortgage has fully closed, it’s best to maintain the same financial habits and commitments you had when you first applied.
How Your Debt-to-Income Ratio Affects Mortgage Approval
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. Credit card debt, student loans and other forms of debt can get in the way of 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 because lenders look at your debt-to-income ratio when considering whether you are a reliable borrower.
Last-Minute Financial Mistakes to Avoid Before Closing
Finally, before submitting your mortgage application, take time to review your finances one last time. Double-check your credit report for errors, confirm your documents are up to date, and ensure your down payment funds are easily traceable and accessible. This last review can help prevent delays, reduce stress, and ensure your mortgage application moves forward smoothly.
From Mortgage Approval to Home Insurance: What’s Next?
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!
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