Deciding to buy a home is an exciting milestone, but you must learn how to get approved for a mortgage. Some first-time homebuyers aren’t aware that there’s a chance their home loan won’t be approved. Therefore, understanding how mortgage approval works will help you avoid this unfortunate and frustrating situation.
Several factors influence your chances of being approved for a mortgage. These include your income, debt, credit score, and down payment. Passing the mortgage stress test also affects home loan approval. To ensure your home loan application is approved, stick to what you can afford. Also, maintain a good credit score and pay down existing debt.
This post covers all you need to know about how to get approved for a mortgage. Let’s take a closer look at the factors influencing mortgage approval first.
Factors Influencing Mortgage Approval
To know how to get approved for a mortgage, you must understand the factors affecting home loan approval. Several financial aspects come into play when lenders consider approving your mortgage application. These include:
- Credit score: In Canada, credit scores range from 300 (very poor) to 900 (excellent). Your credit score informs lenders about your creditworthiness, i.e. your ability to pay down your debts.
- Level of debt: Lenders will calculate your income-to-debt ratio based on how much you owe for loans and other obligations. This allows them to assess whether your income can absorb the existing debt.
- Down payment: The amount you pay in advance when buying property is known as a down payment. It’s based on the purchase price of the house you want to buy. Lenders will consider the size of your down payment in your application.
- Income: Taking out a mortgage is a significant financial commitment. Therefore, lenders will assess whether your current income can sufficiently cover payments for your home loan. Your income also influences how much you can borrow, the mortgage terms, and possibly the interest rate.
- Stress test: Lenders measure whether you can afford mortgage payments at a qualifying interest rate through a stress test. Therefore, you will need to pass it.
How to Get Approved for a Mortgage
Consider the following tips to understand how to get approved for a mortgage.
Stick to What You Can Afford
The first thing you need to consider when looking into how to get approved for a mortgage is your home-buying budget. Finding your dream home is one thing. However, it would be best if you were realistic about what you can afford, given your current financial state.
Lenders will use your financial information to assess your total debts and monthly housing costs. They’ll assess your income, expenses, debts, credit report, and borrowing amount.
Therefore, choosing a property with a purchase price well within your financial bounds is ideal. It’ll give lenders confidence that you can manage payments. And that you can afford your day-to-day expenses.
Maintain a Good Credit Score
The minimum credit score requirement for mortgages in Canada is 640. However, most lenders accept a credit score between 620 and 680, with 660 being ideal.
A good credit score reflects your financial soundness to lenders. And as a result, you may qualify for a lower interest rate. Therefore, check your credit report before submitting a home loan application.
You can get a mortgage from an alternative lender if your credit score is lower. However, the interest rate may be higher. Therefore, consider improving your credit score before applying for a mortgage.
Put Aside a Larger Down Payment
Your down payment is another aspect you should pay attention to when looking into how to get approved for a mortgage. The minimum down payment requirement in Canada depends on your home’s purchase price:
- Less than $500,000: 5% at a minimum
- Between $500,000 to $999,999: 5% of the first $500,000 and 10% of the remaining amount above $500,000
- More than $1 million: 20% at a minimum
While saving a down payment based on the minimum requirement is ideal, it would be best to put aside more. A larger down payment means you won’t have to borrow as much. As a result, you’ll have a smaller loan with less interest and lower monthly payments.
Pay Down Existing Debt
Your level of debt is also worth looking at when determining how to get approved for a mortgage. Lenders may be reluctant to approve your home loan application if you have high debt, including student and car loans.
Therefore, consider paying down your existing debts. You don’t need to get it to zero. However, pay off a considerable amount to ensure lenders don’t see your debt as an inability to handle mortgage payments.
Keep Your Income Stable
Having a stable and reliable income source will increase your chances of mortgage approval. In fact, lenders look for a minimum of more than two years of employment history when you apply for a mortgage. This signals that you don’t pose a risk of defaulting on your home loan, and you can keep up with payments.
While full-time employment makes you the ideal candidate, freelancing, part-time work, or self-employment don’t lower your chances of approval. However, you will have to prove you can make consistent payments.
Pass the Stress Test
Some lenders may run a stress test when you apply for a mortgage. They test whether you can afford payments at a higher interest rate of either 5.25% or the negotiated interest rate plus 2%. You pass the stress test if you can qualify for a mortgage at a higher interest rate.
Get a Mortgage Pre-approval
A mortgage pre-approval is the best way to know how much you can afford to spend on a house. It states the maximum property purchase price you can go for and the lender’s proposed interest rate. Moreover, it’s free to get one.
While you’re not required to get a mortgage pre-approval, it’ll prove beneficial. It allows you to secure an interest rate for 90 to 120 days. And with a pre-approved home loan, you can make an immediate offer when you find a suitable property.
However, a mortgage pre-approval doesn’t guarantee a lender will approve your mortgage application. Therefore, consider it a guide for the ideal property to purchase. Staying within your financial bounds may increase your chances of approval.
The Bottom Line
A mortgage may be your best option for buying a property. Therefore, when looking into how to get approved for a mortgage, pay attention to your financial profile.
Ensure your credit score is above 640, and existing debt is paid down to a reasonable level. In addition, save a down payment higher than the minimum requirement. The more you pay in advance, the more perks you will receive. It’s also best to stay within the bounds of what you can afford.
Buying a house can be daunting, whether you’re a seasoned or first-time homebuyer. Lower First Time Homebuyer Mortgages can take the load off. Their team will navigate the complex mortgage landscape and ensure you walk away with a great deal. Reach out to them today to simplify the home loan process.
