Getting approved for a mortgage is crucial for many Canadians looking to achieve the dream of homeownership. With housing prices rising in recent years, being prepared and knowing what to expect can make navigating the mortgage application process much smoother.
This comprehensive guide covers critical tips for improving your chances of getting approved for a mortgage successfully.
Improve Your Credit Score
Your credit score gives lenders an indication of how reliably you have repaid debts in the past and how likely you are to repay your mortgage. In Canada, scores range from 300 to 900, with scores above 660 generally considered good. The higher your credit score, the better mortgage rates and terms you’re likely to secure.
Improving your credit score well before applying for a mortgage ensures you put your best foot forward right from the start. Here are some practical ways to boost your score:
Pay Down Debts
High balances and credit utilization negatively impact your score. Pay down credit cards, lines of credit, and other debts to improve this vital factor.
Make All Payments On Time
Your payment history is very influential. Carefully paying all bills by their due dates indicates financial responsibility.
Keep Accounts Open
Having long-standing accounts demonstrates stability. Avoid closing older credit cards, as the length of credit history also matters.
Giving yourself ample time to improve your credit score before hitting “apply” sets you up for mortgage success. Patience is key, as your score can take many months to reflect positive credit behaviors.
How to Check and Improve Your Credit Score
The critical first step is to get a clear picture of your credit score. Both major credit bureaus in Canada, Equifax, and TransUnion, allow you to access your credit report and score. Checking reports from both provide a complete view.
Once you have your reports, scour them for any errors. Incorrect information dragging down your score can be investigated and resolved. Pay particular attention to:
- Accounts that don’t belong to you
- Wrong loan or credit payment statuses
- Outdated personal information like addresses
With your true and current credit status confirmed, develop a plan for improving your score. As noted above, strategically paying down balances, maintaining payments, and keeping accounts open all contribute to credit score optimization.
Save for a Sufficient Down Payment
The minimum down payment to purchase a home in Canada depends on the price:
| Home Price | Minimum Down Payment |
| Up to $500K | 5% of purchase price |
| $500K-$1M | 5% of the first $500K plus 10% of the remainder |
| Over $1M | 20% |
While 5% down meets the baseline requirement on lower-priced homes, coming up with more upfront cash makes getting approved significantly easier. Key benefits include:
- Borrowing Less: Less money borrowed means lower mortgage payments and increased affordability.
- Interest Savings: With less financing, you save substantially on interest costs over the mortgage term.
- Avoiding Mortgage Insurance: Down payments above 20% exempt you from expensive CMHC insurance premiums.
Bringing more than the minimum down payment is a leg up in the mortgage approval process.
Here are familiar sources tap into:
RRSP Withdrawals:
The Home Buyer’s Plan temporarily allows first-time buyers to borrow from RRSP savings. The funds are repaid over 15 years without tax penalties.
Sale of Assets:
Cashing out existing investments provides an influx of funds for your real estate purchase.
HELOC Against Other Property:
If you have home equity available, a HELOC (Home Equity Line of Credit) facilitates access.
Increasing your down payment takes planning, discipline, and effort—but the impact on mortgage approval success is unmatched.
Verify and Stabilize Income
Today and tomorrow’s ability to reliably make mortgage payments is central to any lender’s decision. Providing solid proof of stable employment income is key.
For salaried employees, lenders like to see:
- Recent pay stubs confirming salary
- Direct deposit records
- An employer letter with length of employment
For variable income or self-employment:
- Multiple years of tax returns
- Notices of Assessment
- Six months of bank statements
Also, consider supplementing your income documentation with your spouse or partner’s earnings. Their contributions provide a buffer, making approval more likely.
If your situation still raises doubts, ask a family member to co-sign or guarantee the mortgage can shore up deficiencies. Their income and assets then get folded into the affordability assessment.
Reduce Existing Debt Obligations
Carrying substantial debts while trying to take on a mortgage is a classic red flag to lenders. Two key ratios evaluate your capacity to handle both your current debts and new mortgage payments:
Gross Debt Service (GDS) Ratio:
The percentage of gross monthly income needed to cover housing costs includes mortgage payments, taxes, heating, and 50% of condo fees. The typical maximum lenders allow is 39%.
Total Debt Service (TDS) Ratio:
The percentage goes toward housing fees plus minimum debt payments like credit cards, car loans, and student loans. Most lenders set 44% as the upper threshold.
Paying down higher-risk revolving debts like credit cards and lines of credit before applying demonstrates financial responsibility and frees up capacity in those ratios. Avoid burdening yourself with new debts as you go through the mortgage process.
Prepare Documentation and Get Pre-approved
Mortgage lenders require reams of paperwork confirming your financial situation meets their standards. Getting organized ahead of time prevents application delays or problems down the line.
Documentation You’ll Need
- Identification confirming the legal name, birthdate, and SIN
- Income verification, as outlined in Section 3
- Statements showing the source of down payment funds
- Tax documentation like Notices of Assessment
- Records of all liabilities highlighting debts owed
Benefits of Pre-Approval
Getting pre-approved in advance is highly recommended. Pre-approval provides conditional approval verifying:
- The maximum mortgage amount you qualify for
- A locked-in interest rate (typically 60-120 days)
- Flexibility to make quick offers on homes
You’ll still need to provide property specifics for final approval, but pre-approval establishes essential foundations early.
Shop Mortgage Rates From Multiple Lenders
Canada’s mortgage landscape provides multiple options beyond just your bank. Comparing rates across various types of lenders ensures access to the most competitive rates and best-fit products.
Lender Types to Consider
- Major banks
- Credit unions
- Online banks
- Mortgage brokers
- Private lenders
Because brokers have the flexibility to access and negotiate rates with many lenders, they are well-positioned to find borrowers the best deals. It always pays to shop around!
Getting approved for a mortgage involves many moving parts. But going in informed, prepared and with realistic expectations helps stack the odds in your favor. Use these tips to put your best foot forward on the journey to Canadian home ownership.
Alternative Mortgage Options for Struggling Canadians
As we’ve covered, traditional lenders heavily emphasize credit scores and debt levels when approving mortgages. But what if you’re a Canadian who needs mortgage financing but faces challenges like poor credit, no credit history, or past financial struggles? Are affordable mortgage options still possible?
This is where alternative lending specialists like BHM Financial Group can step in.
BHM Financial Group recognizes that life happens and not everyone fits neatly into a box. Since 2005, they’ve provided customized lending solutions to thousands of Canadians dealing with:
- Layoffs
- Medical bills
- Family emergencies
- Business cash flow issues
- Lack of credit history
Their mortgage and loan options place more weight on your current assets and stability rather than past credit blips. Collateral like homes, cars, boats, and land allows you to access financing that typical banks may deny.
Specific programs that can supplement or take the place of traditional mortgages include:
- First mortgages using home equity
- Second mortgages to access equity in a home you already own
- Secured car, truck, RV, and boat loans
Because they take the time to understand your unique situation, the knowledgeable team at BHM Financial Group can find flexible solutions when mortgage roadblocks pop up on your path to homeownership.
If you require creative mortgage financing to buy, refinance or tap extra funds from your home but don’t fit the typical risk profile, consider contacting BHM Financial Group first. Custom programs and patient guidance help open doors that may seem closed.
Frequently Asked Questions
- What credit score do I need to qualify for a mortgage?
Most lenders look for a minimum credit score 660 to qualify for a mortgage with favorable rates. The CMHC backing insured mortgages set their minimum threshold at 600. Scores of 720 or higher prepare you for the best rates and terms.
- How many months of employment history do mortgage lenders want to see?
Many lenders look for at least 12-24 months at your current job. Switching jobs while in the approval process raises concerns over income stability. If you’re self-employed, Providing multiple years of tax returns and/or financial statements helps offset short-term employment.
- What debt-to-income ratio is best for mortgage approval?
Lenders assess two key debt ratios – your Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio. GDS focusing on housing expenses specifically should be at most 39%. Ideally, your overall TDS ratio, including all debts, stays under 44%.