Process of Applying for a Mortgage
The process of applying for a mortgage can be challenging for many first-time home buyers. If you are in the market for a new home, understanding the mortgage application process timeline is a great way to increase your odds of success.
Applying for a Mortgage: Getting Started
Getting a Pre-Qualification Consultation
Before even beginning the mortgage application process, it can be helpful to arrange a pre-qualification call with a mortgage broker. Through this call, you and your broker can look at your financial goals and roughly estimate the size of the mortgage you are eligible for. You can also use an online mortgage calculator to roughly estimate your eligibility.
Getting a pre-qualification consultation helps you gauge your eligibility before formally applying for a mortgage, allowing you to begin searching the market for homes within your estimated price range. Your broker will likely present you with several options, looking at a variety of different lenders, mortgages, and payment structures. You will also be informed of the pros, cons, and risks associated with each plan, allowing you to gauge the best course of action for you.
Getting Pre-Approved for a Mortgage
Once you have decided to move forward with the mortgage application process, your broker will check over a few key financial documents in order to pre-approve your mortgage. A pre-approval is a temporary commitment for a mortgage of specified size and rate. Your broker will not pre-approve you unless they already have a few lenders in mind who could fit your criteria.
Getting a pre-approval is unfortunately not a perfect guarantee that you will get approved, as there are a few property-specific criteria you have to meet later in the mortgage application process.
Here are some of the key documents and financial records you may be asked to provide:
- Proof of income. You will need to provide documentation of your income over the past two years to prove you can afford to pay off your loan. You may be asked to provide income statements, tax returns, and/or proof of additional income. Lenders may even contact your employer in order to confirm that you are currently employed and receiving a steady flow of income.
- Credit check. Most lenders require you to have good credit in order to approve your loan. The higher your credit score, the lower the odds that you will miss payments or default on your mortgage, making you less of a risk to the lender. In Canada, you want to have a credit score of at least 650 to have a good chance of approval. This is the minimum score for many Canadian lenders, even though some are willing to go a bit lower. If you have a low credit score, you will be required to put down a larger down payment in order to reduce the risk to your lender. Having a score over 700 makes you an ideal candidate.
- Debt Service Ratios (GDS and TDS). In order to assess the risk you pose as a borrower, your lender will want to look at your current debt levels. By calculating and analyzing a few key debt ratios, your broker can help you confirm your eligibility for a loan. In order to calculate your debt ratio, you must compare your income against your current level of debt. Your total debt service (TDS), which includes all your monthly lease, vehicle, and credit payments, should not exceed 40% of your current monthly income. Furthermore your gross debt service (GDS), which considers your monthly housing costs, should not exceed 32% of your gross monthly income. Your GDS includes mortgage payments, property taxes, and utility costs.
What to Expect During the Application Process
Once you have been pre-approved for a mortgage, you can reach out to a lender to begin the official application process. On top of all the financial tests you would have already gone through in the pre-approval process, there are a few other things to expect:
Official Credit Bureau Check
As part of the mortgage application process, your lender will request an official report from a Canadian credit bureau. This report will outline your success in paying off previous debts and bills, giving your lender a good idea of your financial history and habits. Your lender will be able to see your credit score as well as any bankruptcies, foreclosures, collections, and/or garnishments on your record.
If there are any problems with your credit report, your lender will point them out to you and discuss your options moving forward. For instance, a low credit score may need to be mitigated by a larger down payment.
Property Analysis
Even once you have passed all the financial background checks, and been tentatively approved for a mortgage, your lender must still approve the property you are planning to purchase. The property will be analyzed to determine if it is worth enough to justify the mortgage loan.
Property inspections and appraisals will likely be conducted to determine the home’s fair market value, and then that value will be compared to the current asking price. These processes will involve additional fees that should be considered when budgeting for your property purchase.
Helpful Tips to Increase Your Chances of Success
- Complete a credit check before beginning the pre-approval process. By examining your credit report, you can determine whether it is good or bad before beginning your consultation with a broker. This gives you a chance to fix your credit score before becoming involved in the mortgage application process.
- Consider working with alternative lenders. If you are looking to work with a AAA lender, you will need to pass the stress test which has recently become more difficult to pass than ever before. If you are unable to meet the requirements of the stress test, you can still secure your mortgage loan by working with a private lender such as a credit union. While private lenders may have higher interest rates (to justify the risk they are taking on), they do have greater flexibility in their eligibility criteria.
- Don’t be afraid to negotiate. Once you identify a lender who you would like to work with, you can then begin discussions about the loan you are looking to obtain. You can negotiate for an optimal interest rate, payment schedule, and mortgage term. If you are looking to get the best deal from your lender, working with a mortgage broker can be a great way to achieve this. Your broker can help you during negotiations, identifying the terms and lender that best suit your needs.
If you are interested in working with one of our professional mortgage brokers, contact Clover Mortgage today for a free consultation!
