There is a lot more to qualifying for a mortgage than a pretty pay check and a healthy savings account. Here are some of the key factors which will affect how much you will qualify for.
Your employment circumstances
- Is your employment full time or part time? If part time, for how long have you been doing this, and how many hours are you guaranteed each week?
- Is part of your income earned from commissions or tips? This can make the whole process a bit iffy. Ask your mortgage specialist.
- How long have you been employed, and how stable is your employment? In fact, if you are on probation when you apply for a mortgage, you will find your income will probably not be included in the calculations. That can be an unwelcome surprise.
- Are you self-employed? The sad truth is lenders are more tentative towards self- employed borrowers. But having said that, if you fit into one of their special lending programs (like a “stated income” program) you might find you will be approved for more than you would expect. It’s complex, ask your mortgage specialist.
- Do you have any credit card balances? Unless you undertake to pay them off prior to closing, your debt service ratios will increase, and your eligible mortgage amount decrease.
- Do you have a monthly car, student loan, installment loan or RRSP loan payment? These obligations will reduce the amount of mortgage you qualify for.
- Are you divorced or separated? Your child or spousal support obligations may negatively impact your mortgage approval.
- Have you co-signed for someone’s car, student loan or even their mortgage? Your lender will calculate your mortgage eligibility as if these are your direct responsibility, even if you have nothing to do with servicing these debts.
- Are you financing a large home? Estimated heating costs are included in debt service ratio calculations, and lenders make adjustments to the amount of monthly heating costs they will impute to your property. The days are long gone when lenders allowed us to estimate $75 for any property, regardless of size.
- Are you financing a condo? Their monthly maintenance fees (fifty percent thereof) are included in the debt service ratio calculations, and the amount of mortgage you will qualify for is less than if you are financing a freehold home.
- Are your heating costs included in your condo maintenance fees? Some are not, and this also affects the amount of mortgage you will qualify for.
- For how long can you demonstrate an excellent credit history? Say your credit report consists of only one credit card which you got just last year; your mortgage lender may decline your application.
- How many trade lines are being reported on your credit report? Some people don’t believe in credit “it’s the devil’s work”. Good luck to them securing a mortgage. Lenders want to see you can demonstrate the responsible use of available credit.
- How high is your credit score? Normal acceptable debt service ratios are 35% for your gross debt service ratio, and 42% for your total debt service ratio. But, many lenders will increase these ratios to 39% and 44% if your score is greater than 680.
Related Article: Debt service ratios are standard measures of one’s “ability to pay” (Canadian Mortgage Trends)
Your down payment
- With a few “A” lenders, if you have at least 50% equity in your home, and can demonstrate some additional assets, your debt service ratios barely matter. They will lend based on your overall net worth.
- This can also be true for recent immigrants who fit into lenders’ “New to Canada” programs, and who have at least a 35% down payment.
Your other real estate holdings (direct or indirect)
- If you have co-signed for someone’s mortgage (typically that is a family member) your borrowing power maybe significantly impaired. If you own rental property, you will need to disclose all pertinent details of this property.
- Lenders take differing approaches to the treatment of rental income and expenses when calculating your debt service ratios. You can be sure these properties will affect your mortgage eligibility to some extent.
- Similarly, if you own a second home, like a vacation cottage or pied-à-terre, this will also factor into your mortgage eligibility.
Rental offsets and add-backs can be a confusing topic, but they do have to be considered when applying for a new mortgage.
Related Article: Rental offsets (Canadian Mortgage Trends)
Is your mortgage high ratio or conventional?
- If your mortgage is high ratio, your lender is going to need default insurance on your mortgage, and the final word on your approval will be with the mortgage insurer. (CMHC, Genworth, or Canada Guaranty)
- And did you know many lenders will also insure conventional mortgages behind the scenes? (You won’t necessarily be aware, as they are not passing the cost of the insurance premium onto you) In such cases, your mortgage eligibility is subject to their blessing too.
Your mortgage specifics
- If you want to have a variable rate mortgage, or if you choose a term less than five years you will qualify for a smaller mortgage than if you select a five year, fixed rate mortgage.
- The longer your amortization period, the lower your monthly mortgage payment. Ergo, the more mortgage you may qualify for.
Related Article: 35 year amortizations are still available
The last word
These seven factors affect your mortgage approval, and this list is probably not even exhaustive. The more I write the more factors I think of. So unless you feel your personal finances are so strong that this discussion does not apply to you, you should consult a mortgage specialist in advance of making a major mortgage decision. If you prefer, you can educate yourself all about mortgages by following a few trusted online resources.
Useful Website: The mortgage resource website – where dozens of mortgage blogs and articles are curated each week