Are you ready to apply for a mortgage?

When you find that home you’ve always dreamed of purchasing, are you prepared to qualify for the mortgage? Learn about the key steps to take before shopping for your home.

When you make an offer on a house, you will typically have seven to 10 days to remove conditions, one of which is to obtain mortgage approval. What can you do to ensure that you receive the mortgage approval with minimal problems? The following five points focus on the debt and income aspects of qualifying for a mortgage.

Your credit report

There are two key credit bureaus in Canada – Equifax and Transunion. You can order credit reports which include a beacon score from both of these agencies. First, you need to make sure that everything on that report is accurate. If there is incorrect information, you will need to take steps to correct it right away. Depending upon the error, it may take time, even months, to correct any errors.

Your beacon score

Most lenders will require a beacon score of at least 620. If your score is higher, you may be eligible for better rates or special qualifications, including using stated income instead of proving your income (this is important for some self-employed individuals). If your score is on the low side, some steps that you can take include:

  • making your credit card payments before your statements are issued rather than after
  • paying down the balances on your credit cards
  • minimizing the number of loan applications you make with different lenders

These actions could improve your score within a few weeks. For longer-term changes, make sure that you pay all of your monthly payments on time, avoid collections and judgements, and have at least two credit sources with at least two years of history.

Your debt

Besides the mortgage itself, lenders will also consider the amount of other debt that you have and your required monthly payments. These other debts will directly reduce the amount of mortgage that you can qualify for. If you are looking to make other major purchases that will require loans (i.e. car purchase), you should likely make the house purchase first, then buy the car second. The car loan can significantly reduce your house affordability. If you have credit cards and lines of credit, even if you pay interest only, most lenders will assume your monthly payment is three per cent of the outstanding balance, again, significantly reducing your house affordability.

Your income

Many people do not realize that not all income is treated the same. First, for an employee, lenders want to see you employed for at least three months at your current job with no probation period. They will require a recent employment letter that states at least your guaranteed hours of work and your rate of pay. Lenders do not include overtime or other bonuses as part of your income unless you can back it up with two years of T4s. Some employers do not provide guaranteed hours and this can lead to issues when the lender determines how much you can qualify for. 

For self-employed people, most lenders will use your last two-year average income as reported on your tax return. If you are incorporated, this can lead to further issues in determining your income for qualification purposes. Another option for the self-employed with some lenders is to use a stated income, but you will need a higher beacon score than normal and will likely have a higher interest rate.

Your cash flow

A common question is how much can I qualify for? Based on the above facts, there are firm guidelines that will determine the maximum mortgage that you will be able to obtain. Most people will give this number to their realtor and go house shopping. Rather, you should be asking yourself how much you can afford based on your actual cash flow, not based on how much the lenders will allow you to borrow. While you may be able to afford the mortgage payments today, you have to always ask yourself what will happen if interest rates rise. Many young clients and new-to-Canada clients do not realize that three per cent interest rates are not normal, long-term interest rates. Five to six per cent are more typical long-term rates and these rates have been double digits in the past. 

By addressing the above points, you will be able to determine, first, if you are ready to buy a home, and second, the price range of houses that you can afford. In a follow-up blog, I will discuss other issues affecting mortgage qualification.

Keep the conversation going

These are the key issues that face many individuals trying to obtain a mortgage. What other issues have you encountered when you tried to get that final mortgage approval? Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Brian Ludwig

Brian Ludwig is a Chartered Professional Accountant, an Accredited Mortgage Planner and a Certified Financial Planner working within his public practice in Regina.