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Requirements To Apply For A Mortgage In Canada

Purchasing a home often requires securing a mortgage to finance the purchase, as the price of a home typically exceeds what most Canadians can afford to pay upfront in cash.

To obtain a mortgage, you must find a lender willing to provide the necessary funds. Additionally, there are specific criteria you must meet to qualify for a mortgage.

Continue reading to learn about the approval process for a mortgage in Canada and the steps to take when working with a lender.

As you can imagine, mortgage lenders don’t simply approve large loans for just anyone. Instead, they have specific criteria that applicants must meet before a loan is granted. Lenders will assess various aspects of your financial situation before approving your mortgage application.

Here are the key requirements Canadians must fulfill to secure a mortgage in Canada:

Credit Score

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Your credit score plays a crucial role in securing a mortgage. In Canada, credit scores range from 300 to 900, with lenders typically requiring a minimum score of between 650 and 680.

Sufficient Income

Your income must be enough to cover not only your mortgage payments but also all other financial obligations. Lenders assess your income relative to your existing debts by looking at your debt-to-income ratio, which shows how much of your gross monthly income goes towards debt repayment. A lower ratio is more favorable.

Minimal Debts

If you already carry significant debt, it might be harder to take on the additional responsibility of a mortgage. In such cases, reducing your existing debt before applying for a mortgage may improve your chances of approval.

Down Payment

To secure a conventional mortgage, you need to come up with a down payment that goes towards the home’s purchase price. The higher the down payment, the lower your overall loan amount will be, which will also reduce our loan-to-value ratio, which is a measure of the loan amount you have relative to the value of the property. Different lenders may require different down payment amounts, and your financial profile will also dictate how much you need to put down. But generally speaking, 5% of the purchase price of the home is the minimum.

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Mortgage Down Payment Rules In Canada

As previously stated, you'll need to provide a down payment to qualify for a mortgage, with 5% of the home's purchase price generally being the minimum requirement. However, if you'd like to avoid paying mortgage default insurance (which protects the lender if you fail to repay the loan), you'll need to contribute at least 20% as a down payment. Anything less than 20% will automatically require the payment of mortgage default insurance.

The cost of this insurance is calculated as a percentage of the home's purchase price. Typically, mortgage default insurance ranges from 2.80% to 4.00% of the home's price, and it is usually included in your mortgage payments. While this additional cost may seem like an extra burden, it makes homeownership possible for many Canadians who might not otherwise be able to enter the real estate market.

After submitting your online application, the next step is to gather any required documentation. This may include bank statements, proof of employment, a government-issued ID, or other supporting documents. It’s important to collect all the necessary paperwork upfront to avoid delays. Having everything ready means that if the lender requests additional information, you’ll be able to provide it promptly, speeding up the approval process and ensuring a smoother experience overall.

Should You Get A Mortgage Through A Bank Or Mortgage Broker?

Whether you choose to work with a bank or a mortgage broker, there are benefits and drawbacks to both.

Working With a Bank
Many homebuyers choose to apply for a mortgage with the bank they already use for their everyday banking. While this can be convenient, it’s important to note that banks can only offer their own mortgage products. This means that their options are limited, which in turn limits what borrowers can access.

Working With a Mortgage Broker
Working with a mortgage broker offers a different experience. Instead of representing a single financial institution, mortgage brokers have access to a wide range of lenders within their network. They act as intermediaries, negotiating with multiple lenders on your behalf to find the one that best fits your needs.

Instead of shopping around yourself, the mortgage broker handles the comparisons. You’ll only need to complete one application, and the broker will approach various lenders to see what they can offer you before helping you choose the best option. Mortgage brokers are usually compensated through a referral fee paid by the lenders, meaning you won’t receive a direct bill for their services.

Here’s a brief overview of the different types of mortgage products:

1. Second Mortgage: This is a loan taken out on a property that already has a primary mortgage. It allows homeowners to borrow against the equity in their home, often at higher interest rates.

2. Mortgage Refinancing: Refinancing involves replacing your existing mortgage with a new one, typically to get a lower interest rate, change the term of the loan, or access home equity.

3. Home Equity Loan: This is a loan that allows homeowners to borrow money using the equity in their home as collateral. It’s often used for home renovations or large expenses.

4. Rent-to-Own Program: This arrangement lets you rent a home with the option to buy it later, usually at a predetermined price. Part of your rent may go toward the eventual purchase.

5. Bridge Loan: A short-term loan that helps homebuyers “bridge the gap” between buying a new home and selling their current home. It provides temporary funding until long-term financing is secured.

6. Farm Mortgage: A loan specifically designed for purchasing agricultural property or refinancing an existing farm mortgage. It’s usually available to farmers or agribusinesses.

7. Ported Mortgage: This type of mortgage allows homeowners to transfer their current mortgage terms (like interest rate and balance) to a new home when they move, without penalty.

8. Joint Mortgage: A mortgage shared between two or more people, often used by couples or business partners to buy a home together. All borrowers are responsible for the loan repayment.

9. No Down Payment Mortgage: A mortgage that allows you to buy a home without making a down payment. These are less common but may be available through specific government programs or lenders.

10. Mortgage for a Foreclosed Home: A loan specifically for purchasing a home that has been foreclosed upon, often at a discounted price. These homes are typically sold by banks or other lenders.

Let me know if you would like more information on any of these options!

Should You Get a Fixed-Rate Mortgage or a Variable-Rate Mortgage?

When you're shopping for a mortgage, one key decision is choosing between a fixed-rate and a variable-rate mortgage.

Fixed-Rate Mortgage
A fixed-rate mortgage offers a constant interest rate throughout the entire term, meaning your monthly payments will remain the same. This option is ideal for those who prefer stability and predictability in their finances. It’s especially beneficial if you anticipate that interest rates may rise in the future, as locking in a fixed rate can help you avoid potential increases.

Variable-Rate Mortgage
A variable-rate mortgage, on the other hand, has an interest rate that fluctuates over time based on market conditions. These mortgages often start with a lower interest rate than fixed-rate options during an introductory period. However, once this period ends, the rate can adjust—either going up or down—depending on the current market trends. This option can be appealing if you expect rates to remain low or decrease, but it carries more risk since payments can increase if rates go up.

Types of Mortgage Payment Frequencies
When it comes to mortgages, one important aspect to consider is the frequency of your payments. Mortgages are repaid in installments over a set period, and each payment you make contributes to paying off the loan.

There are several payment frequency options available, including:

• Monthly: You make one payment per month. This is the most common and straightforward option.

• Semi-monthly: Payments are made twice a month, typically on set dates (e.g., the 1st and 15th of each month).

• Bi-weekly: Payments are made every two weeks, resulting in 26 payments a year (as opposed to 12 with monthly payments).

• Weekly: Payments are made every week, which means you'll make 52 payments per year.

Additionally, you might consider paying off your mortgage early, but it’s important to weigh the potential benefits and any penalties or fees. Be sure to consult with a mortgage professional to understand the implications of making extra payments or paying off your loan ahead of schedule.

Mortgage Closing Costs to Consider
Before you receive the keys to your new home, there are several closing costs you'll need to account for, in addition to your mortgage payments. These costs can include:

• Lawyer Fees: Fees for legal services required to finalize the purchase, including reviewing documents and ensuring the transaction is legally sound.

• Title Insurance Fees: Insurance that protects you and the lender against potential legal issues with the property's title, such as ownership disputes.

• Appraisal Fees: The cost of hiring a professional to assess the value of the property, ensuring it’s worth the amount you’re borrowing.

• Home Inspection Fees: A fee for having a qualified inspector assess the home’s condition, looking for potential problems that could affect its value or your future costs.

• Land Transfer Taxes: Taxes imposed by the government when transferring ownership of the property. These taxes vary depending on the location and the price of the home.

• Adjustments: Costs for prepaid property expenses, such as property taxes or utility bills, that need to be prorated between the buyer and the seller.

• Status Certificate Access (if buying a condo): If you're purchasing a condominium, you’ll need to pay for a status certificate, which provides details about the condo’s financial and legal standing.

• Land Survey Fees: If required, this fee covers the cost of a survey to confirm property boundaries and ensure there are no disputes about the land's size or limits.

Be sure to budget for these additional costs as part of your overall home-buying expenses.

What is a Mortgage Amortization Period?

The amortization period refers to the total amount of time you have to repay your mortgage loan in full. You can choose between a short-term or long-term amortization period, and each comes with its own set of advantages and disadvantages.

• Short-term Amortization Period: If you opt for a shorter period, like 15 years, you can pay off your loan more quickly, which means you'll become debt-free sooner. Additionally, you’ll save a significant amount on interest costs over the life of the loan. However, the tradeoff is that your monthly mortgage payments will be higher to ensure the loan is paid off within the shorter time frame.

• Long-term Amortization Period: With a longer period, such as 25 years, your monthly mortgage payments will be lower, making it more affordable in the short term. However, the downside is that you’ll pay much more in interest over the course of the loan, and it will take you much longer to fully pay off the mortgage.

The decision between a short-term or long-term amortization period depends on your financial goals, budget, and how quickly you want to pay off your mortgage.

Once you've chosen the loan type and lender that suit your needs, it's time to apply. The simplest way to do so is by applying online.

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Should You Get A Pre-Approved Mortgage?

It’s highly recommended that homebuyers get pre-approved for a mortgage before starting their house hunt. There are several advantages to getting pre-approved. It helps determine your budget by showing you how much you can afford to spend on a home. This allows you to focus on properties within your price range, saving you time and avoiding disappointment.

Pre-approval also gives you a competitive edge in the market, particularly in situations where there are multiple offers. Sellers tend to view pre-approved buyers more favorably, as it shows you’re serious and financially ready.

Moreover, pre-approval can help streamline the mortgage approval process once you’ve found your ideal home and made an offer. Since much of the paperwork is already completed, you’ll just need to submit the purchase agreement to the lender for final approval.

However, it’s important to remember that pre-approvals are typically valid for 90 to 120 days. After this period, the pre-approval will no longer be valid.

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Mortgage FAQs

What credit score do I need to get approved for a mortgage?

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To qualify for a mortgage with a conventional lender, you generally need a credit score of at least 650 to 680. If your score is lower than that, you may need to explore options with private lenders who specialize in working with borrowers with poor credit.

What’s the difference between a mortgage pre-qualification and a mortgage pre-approval?

A pre-qualification is an estimate based on your basic financial information, giving you an idea of how much mortgage you may qualify for and the potential interest rate. In contrast, a pre-approval is a more thorough process involving detailed documentation. It provides a more accurate assessment and a written commitment from the lender. Additionally, with a pre-approval, you can lock in an interest rate for up to 120 days, while a pre-qualification is only an estimate.

What is a mortgage stress test?

A mortgage stress test is a tool used to ensure that a borrower can still afford their mortgage payments if interest rates rise or if they face financial challenges. To pass the stress test, borrowers must demonstrate they can qualify for the mortgage at a rate of 5.25% or at their contracted rate plus an additional 2%.

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