For many Canadians, buying a house is a huge milestone—and a daunting prospect. Between lenders, mortgages, and down payments, not to mention actually choosing your new home, there’s a lot to consider. The very first thing you’ll need to look at is how to get approved for a mortgage because that will tell you how much you can spend and what it will take to pay it back.
In general, the better your financial hygiene, the more money you’ll be able to borrow, and the lower the rate. There’s no better time than the present to start learning about how to get a mortgage if you’re interested in buying a house. Whether you’re a month or a year away from looking for your new home, there are smart steps you can take to make the most of your position. Here are seven of our top strategies to make the process of applying for a mortgage in Canada as seamless as possible.
Tips on How to Get Approved for a Mortgage
Getting approved for a mortgage is a lot easier if you follow these steps.
Raise your credit score
A good credit score is going to give you leverage when you apply for a mortgage. The buying process can take time—time you can spend on making sure your credit score is as strong as possible—so it’s a good idea to check your score as soon as you start thinking about buying a house.
There are many factors that affect your credit score including how long you’ve carried credit, how much of your credit you use, and even simply whether you pay your bills on time. Whatever your score, you can improve your credit. You can use a secured card to establish yourself, a low-interest credit card or a balance transfer offer to reduce your debt. There’s even online credit-score building technology to help you improve your score ASAP.
Pay down your debt
Mortgages are loans and mortgage providers are lenders. If you’re carrying a high debt load with other lenders (like credit cards), it may lead lenders to question whether you’ll be able to pay your mortgage on time. Increase your chances for approval by paying down your existing debt.
There are many debt-reduction strategies out there including credit counselling, debt consolidation loans, and strict budgeting. According to Equifax, the average Canadian holds $23,496 in non-mortgage debt—much of which is on credit cards. Pay down your credit card debt by negotiating a lower interest rate, using a lower interest rate card, taking advantage of balance transfer promotions, or using a pre-paid card.
Save up for your down payment
Before you can buy a house, you’ll need to come up with a down payment. Mortgage rules in Canada require at least 5% on a home that’s $500,000 or less, and at least 20% on homes of $1 million or more. If the purchase price falls in between, you’ll need 5% on the first $500,000 and 10% on the rest. Beyond these thresholds, however, you should know that a larger down payment can help you get approved for a mortgage, even if you have some weaknesses like a lower credit score.
Down payment savings strategies vary, but it’s crucial to make putting away that money a priority. Scrimping and budgeting will only go so far if aren’t disciplined in where you put the extra money. Depending on your home-buying timeline, certain investments may work well to bump up your down payment. Look into high-interest savings accounts (HISAs) or GICs for shorter-term investments or, if you have a bit of time to work with, consider investing in the stock market.
Show a steady source of income
When you apply for a mortgage, lenders will want to know that you can pay them back. So, showing that you have a stable income is key. This is fairly easy if you’re a salaried employee, however, freelance or self-employed Canadians will need to use their notices of assessment from the Canada Revenue Agency (CRA) going back two years.
If you can’t meet these requirements, consider putting off your home purchase while you build up a steady employment record. You can also use this time to improve your credit score, pay down debt, and save towards your down payment.
Establish a relationship with your bank
As mortgage lenders, banks want to be reasonably sure that you’re able to pay them back. One way to tip the scales in your favour is to do business with them. Opening an account, having (and responsibly using) a credit card, or even borrowing and paying back a smaller loan are all effective ways to establish yourself as a good candidate for a mortgage.
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Get a mortgage pre-approval
While you’re working through how to get approved for a mortgage, you might overlook one valuable step: Getting a mortgage pre-approval. A pre-approval isn’t mandatory, but it can be a huge benefit to your process.
When looking for pre-approval, you’ll either need to work directly with a mortgage lender or with a mortgage broker, who can negotiate on your behalf. Different lenders offer different rates so you (or your broker) should definitely shop around.
To begin, you’ll need to provide your documentation like proof of assets and income, information about your debts, and investment statements. Your broker will work with lenders to come up with a pre-approved amount they’ll lend you. This offer will be good for a set period such as 90 or 120 days. Once you have this offer in hand, you’ll have a clear picture of what you can afford. This empowers you to move quickly if, and when, you find your dream home.
The Last Word
Things can be confounding when you set out to purchase a home but figuring out how to get approved for a mortgage doesn’t have to be. A bit of planning around your credit score, employment history, and debt situation will go a long way towards a successful mortgage application, while artfully building your savings towards a down payment can strengthen your position. For everything else, there are experts such as mortgage brokers who can negotiate on your behalf.