Whether you can qualify for a mortgage in Ontario depends on many factors. From your income and debt service ratios to your credit history and available down payment, lenders consider numerous factors when making financing decisions.
At Jason Anbara Mortgages, we know all the ins and outs of how to qualify for a mortgage in Ontario, and in this blog, we’ll share some key tips.
What is Mortgage Qualification?
Mortgage qualification is the process of getting approved for mortgage financing when either purchasing a new home or refinancing an existing one. While there are multiple mortgage qualification criteria lenders look at when assessing a borrower’s application, the key factors come down to:
- Credit score, with higher scores required for lower interest rates.
- Income requirements such as stable income, acceptable debt service ratios, and stress testing.
- Down payment of 5% to 10% or more for residential properties.
With that said, let’s take a closer look at how these criteria impact an applicant’s ability to qualify for a mortgage in Ontario.
Credit Score Requirements
When reviewing your application, mortgage lenders pull your Equifax or TransUnion credit report and examine your credit history. The report should show at least two years of timely bill payments and a good credit score. In the eyes of the lender, a good repayment track record serves as a reliable predictor of your future payment patterns.
While you don’t need the perfect credit score to get approved for a mortgage, most “A grade” lenders typically require a credit score of at least 650 to 680. To keep your credit report in good shape, ensure that you:
- Have at least two forms of credit
- Pay all your bills on time
- Keep your credit card and credit line balances below 30% of the total credit limit
- Avoid closing credit accounts, as this will negatively impact your credit score
Income Verification
To qualify for a mortgage in Ontario, you will also need to prove to the lender that you earn enough to cover your mortgage payments and other financial obligations.
As a rule of thumb, you can afford a home that costs approximately four times the value of your gross annual household income. For instance, if you earn $150,000 per year between you and your spouse, you would be able to purchase a home that costs $600,000. However, this number may be much lower if you have a lot of debt.
You may be asked to provide supporting documentation like pay stubs or a letter of employment to prove your reliable income. If you are self-employed, you may be asked to provide personal tax Notices of Assessment for the past two to three years instead.
Debt-to-income Ratio
Lenders evaluate your debt-to-income ratios to verify that you can afford mortgage payments. This typically involves looking at two types of ratios when assessing mortgage applications:
- Gross Debt Service (GDS) is calculated as the percentage of your monthly household income that goes towards your housing costs like mortgage payments, property taxes, and homeowner’s insurance. Your GDS must not exceed 39%.
- Total Debt Service (TDS) is calculated as the percentage of your monthly household income that covers all types of debt, including car loans, student loans, credit card payments, and more. Your TDS must not exceed 44%.
Employment History
Most of the time, mortgage lenders like to see two years of employment history within the same industry to approve a mortgage loan.
For self-employed individuals, lenders typically ask to provide two to three years of personal tax Notices of Assessment. In addition to these documents, you may need to provide additional paperwork, such as:
- Financial statements for your business
- Contracts showing expected revenue for the coming years
- Proof that your HST and GST is paid in full
- Evidence that you are a principal owner of the business
- Your personal and business credit scores
- Proof that your down payment has not been gifted
- A copy of your business or GST license or Article of Incorporation showing that you are licensed
Down Payment Options
To qualify for a mortgage in Ontario, you will need to put a certain amount of money down on the purchase of your property and show that you have a further 1% to 1.5% set aside to cover closing costs.
The minimum down payment requirement for residential properties under $500,000 is 5% of the purchase price. For homes that cost between $500,000 and $999,999, the minimum down payment can be calculated as 5% on the first $500,000 and 10% on the portion of the purchase price above $500,000. Finally, properties purchased for $1 million or more require at least a 20% down payment.
Generally, the more you can put down, the better. Plus, putting down 20% or more will free you of additional CMHC insurance costs. Your down payment funds may come from various acceptable sources, the most common of which include home sale proceeds, personal savings, RRSPs, and gifts from immediate family members.
Property Appraisal and Valuation
Finally, when evaluating your mortgage application, lenders want to know exactly what you are purchasing, its location, physical condition, and appraised value. In case you fail to make your mortgage payments, the lender needs to know that they can seize your property, sell it, and recover the funds. Most lenders will conduct either a virtual valuation or a physical drive-by valuation.
The Benefits of Getting Pre-Approved
Unlike a complete mortgage qualification, a mortgage pre-approval is a quick and easy process that allows you to gauge the mortgage loan you could receive. While mortgage pre-approval does not guarantee you will get the necessary financing, it does offer a range of benefits:
- It allows you to know your borrowing capacity
- It helps to narrow down your search for properties
- It gives you more credibility in the eyes of the home seller
- It will enable you to lock in favourable interest rates
- It allows you to plan ahead for your future mortgage payments
Working with a Mortgage Broker
When researching how to qualify for a mortgage in Ontario, it is important to understand that many variables go into the lender’s decision. Even if you get approved for a mortgage, the exact terms and interest rates may vary depending on these variables and the overall strength of your application.
To maximize your chance of approval and get the lowest interest rates available, we recommend working with a certified mortgage broker like Jason Anbara. Contact us today to secure mortgage financing with confidence.
