Key Factors Mortgage Companies Consider When Granting a Mortgage in Canada
Securing a mortgage in Canada is a critical step for many aspiring homeowners. Mortgage companies evaluate several factors to determine a borrower’s eligibility, ensuring that applicants can manage the financial responsibilities of homeownership. Understanding these criteria can help prospective buyers prepare effectively and improve their chances of approval.
1. Credit Score and Credit History
One of the primary factors mortgage lenders consider is the applicant’s credit score. This numerical representation of an individual’s creditworthiness is derived from their credit history, which includes past borrowing, repayment habits, and overall debt management. In Canada, credit scores typically range from 300 to 900, with a score of 680 or higher considered good by most lenders.
Lenders assess:
Payment History: Timely payments on credit cards, loans, and bills.
Credit Utilization: The ratio of credit used to available credit.
Length of Credit History: How long accounts have been active.
Types of Credit: A mix of credit accounts, such as credit cards, auto loans, and personal loans.
Recent Credit Inquiries: Frequent applications for new credit can be a red flag.
2. Income and Employment Stability
Mortgage companies need assurance that borrowers have a stable and sufficient income to cover mortgage payments. Lenders will verify:
Employment Status: Full-time employment is preferred, but part-time, self-employment, and contract work are considered with additional documentation.
Length of Employment: Longer tenure in a current job suggests stability.
Income Level: Gross income, including salary, bonuses, commissions, and additional income sources.
Documentation: Pay stubs, tax returns, and letters of employment may be required.
3. Debt-to-Income Ratio (DTI)
The DTI ratio compares an applicant’s monthly debt payments to their gross monthly income. This ratio helps lenders determine how much additional debt a borrower can handle. In Canada, two key ratios are considered:
Gross Debt Service (GDS) Ratio: Should generally not exceed 32% of gross income. It includes mortgage payments, property taxes, heating costs, and 50% of condo fees.
Total Debt Service (TDS) Ratio: Should typically be below 40-44% of gross income. It includes all debts, such as credit cards, car loans, and personal loans.
4. Down Payment
The down payment is a crucial component of the mortgage application. In Canada, the minimum down payment depends on the home price:
5% for homes up to $500,000.
10% for the portion of the home price between $500,000 and $999,999.
20% for homes priced at $1 million or more.
A larger down payment can improve the chances of approval and reduce the need for mortgage default insurance.
5. Property Details
Lenders also evaluate the property being purchased to ensure it holds sufficient value and can serve as collateral. They consider:
Property Appraisal: An assessment of the property’s market value.
Location: Properties in stable or growing markets are preferred.
Condition: Well-maintained properties are less risky.
6. Mortgage Insurance (if applicable)
For down payments less than 20%, borrowers must obtain mortgage default insurance from providers like CMHC, Genworth Canada, or Canada Guaranty. This insurance protects the lender if the borrower defaults on the loan. The insurance premium is added to the mortgage and varies based on the down payment size.
7. Additional Factors
Savings and Assets: Demonstrates financial resilience.
Co-signers: Can strengthen an application if the primary borrower has weak financials.
Residency Status: Permanent residents and Canadian citizens have more straightforward qualification processes compared to non-residents.
Conclusion
Understanding the criteria mortgage companies use helps applicants better prepare for the approval process. By maintaining a strong credit history, stable income, manageable debt levels, and a solid down payment, prospective homeowners can significantly enhance their mortgage eligibility in Canada.