Applying for a Mortgage

It is hard to walk into a bank and lay your future on the line.  Applying for a new mortgage means the possibility of rejection and being human, we don't like that possibility.

Remember that you are a customer.  The bank wants your business as much as you want the loan.  So be ready to look them in the eye and as equals say, "can we do business?"

Your lender is going to qualify you for a loan based on your past credit history, your present income and expenses, and your ability to repay the loan. OK, so that is fairly standard.  They will offer you some terms, but they are usually willing to discuss better terms, especially if you are ready to shop around.  If you are rejected, go next door to the next bank or credit union.  

If you apply for your mortgage before you begin to look at homes you will be in a better position to handle the stress of the process.  As a more relaxed buyer of their services you can feel more confidence in asking for what you need. 

If the banks are not willing to help you because of credit or income issues, ask your Realtor to help find other financing possibilities.  Be prepared to accept that you may not have the right financial picture at this time to buy a house.  At least you will know this before you fall in love with the 'perfect' house.

Down Payments

Banks are prohibited from lending more than 75% of a property's value (as established by an appraiser). If you have at least 25% of a home's value, you qualify for a 'conventional' mortgage. 

However, if you have less than 25% down Canadian Mortgage and Housing Corporation (CMHC) will provide insurance to the bank for what is called a 'high ratio mortgage.' A high ratio mortgage is one where more than 75% of a property's value is financed. If you meet your lender's credit approval criteria, you can purchase your next home with as little as 5% down and a CMHC insured mortgage for the balance.

Qualifying

Lenders look at three things when considering your mortgage application. They include the applicant's past history of credit, their ability to repay the loan, and the security pledged against the loan.

Your past performance in these areas will provide your lender with their best guess on how you'll handle your mortgage obligation. If you are turned down for a mortgage based on credit history, be sure to ask the lender to help you with a plan to recover a good credit rating so that you can buy later.  Sometimes banks will consider a co-signer such as a parent or other relative.

Usually the property that you are purchasing will provide enough security for the lender. If the lender feels that you are a high risk, they may ask you to pledge other assets that you have or a relative may have to protect them against default.

When it comes to your ability to repay the loan, the lender will want to confirm that you have enough income to pay the mortgage.  You'll need to provide the lender with a verification of your income.

Banks generally look at the percentage of your gross income required to pay your mortgage payment, including principal and interest, your property taxes, and your heating bill. Most lenders will not allow you to use more than 32% of your gross monthly income to meet these expenses. In a way, it does not matter if the bank says yes, you can afford it, in the end you have to decide if it is indeed affordable given your lifestyle.