Lenders will review five factors on your mortgage application:
- Employment History
- Credit History
- Property Value
Consider how a lender would view your application by noting your strengths and weaknesses. To be favorably considered, your application must have the following:
- Housing expense ratio no greater than 32%. The lower the ratio, the better
- A secure, steady income at the same job for two years or longer
- Debt-to-income ratio no greater than 42%. The lower the ratio, the better
- Good credit rating showing that bills have been paid on time
- House is worth what the buyer is paying
When applying for a mortgage, the first step the lender will take will be to review your income. This can be from many sources as long as the income is plausible, such as full or part-time employment, self-employed business owners, rental properties, support or alimony payments, or pensions. The lender will require a letter from your full or part-time employer to confirm income, especially if you have had the job for less than two years. You should have copies of your last two year’s tax returns and be up-to-date with any outstanding taxes.
The lender will also determine if your total income will be sufficient for housing costs to determine if you can afford to buy a home. If your house payment comprises the major portion of your income, you’re more likely to encounter difficulties making your payments because of other financial obligations, such as car expenses, medical bills, etc. But if your mortgage payment comprises a lesser amount of your total income, this means you can afford the house.
The government of Canada recently introduced a stress test to make sure that borrowers will be financially stable if interest rates rise substantially compared to today’s interest rates. This is the greater of the Bank of Canada benchmark rate (currently 5.34%) or the contract rate plus 2%, so you will have to qualify at a higher rate than what the banks will offer you. Some banks offer products that qualify in very particular ways, so it is in your best interest to seek a mortgage broker who can navigate the qualification process for you.
The lender will also compare your current housing payments to the cost of buying a home. The smaller the difference you need to pay each month, the stronger your application.
The lender will also look at your debts, including your proposed house payment, as well as monthly payments for loans, credit cards, car leases or child support. It is important that you indicate any debts you have on your mortgage application as they can impact your borrowing ability and if the banks find out that you have additional expenses prior to funding you may not get financed!
Evidence of regular income is another critical factor lenders consider. They are more inclined to favor applicants who have worked at one job continuously for several years or have remained in the same field. However, you can still qualify for a mortgage if you’ve changed jobs recently as long as your new employer can prove your income with a Letter of Employment confirming your date of hire, position, and rate of pay, as well as recent pay stubs confirming this amount.
If you’re self-employed or have worked at a job for less than two years, lenders may ask for additional information, such as federal income tax statements, to verify your income.
To qualify for a mortgage, a good credit rating is essential. In addition to reviewing your debt and income, a lender will also pull your credit report, which details your payment history and how you’ve handled your past obligations. It’s recommended that you obtain a copy of your credit report before you apply for a mortgage and verify its accuracy or correct any errors before applying for a mortgage. However, each credit “pull” will slightly negatively impact your credit score for a short period of time, so refrain from pulling your credit too often.