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Mike Shafie

604.230.1000

 
The five factors that count the most when lenders are deciding whether you qualify for a mortgage loan are:
  • Your income
  • Your debts
  • Your employment history
  • Your credit history
  • Your property value

Your Income

One of the first questions a lender will consider is how much of your total income you’ll be spending on housing. This information helps the lender decide whether you can comfortably afford a home. If the house payment represents a large portion of your income, you’re more likely to have trouble making these house payments because of your other potential expenses (such as car, furniture etc.). On the other hand, if the house payment is a small portion of your income, chances are better that you can truly afford the house.

When you’re applying for a loan, the lender will look at your ‘gross income’. Your ‘gross income’ is all the money you earn before taxes, including overtime, commissions, dividends and any other sources. You must be able to show a steady history for these sources. For example, many lenders will count income from a part-time or seasonal job as long as you can show that you’ve had the job for at least two years.

One important thing your lender will do is compare your housing expenses now to the expense you’ll have if you buy a home. The smaller the increase, the stronger your application looks.

 

Your Debts

In addition to your income, a lender will look at your debts. Generally your debts include your house payment as well as payments on all loans, charge cards, child support, etc. that you make each month.

If you’re overloaded with debts, perhaps taking equity from your home to consolidate your debt is a viable, cost saving option. 

 

Your Employment History

You don’t need to be wealthy to qualify for a mortgage, but a history of steady employment in any occupation helps. Lenders are more likely to lend money to people who have worked for several years at the same job, or at the same type of job. However, if you’ve only been in your current job a short while, this won’t necessarily stop you from getting the loan, as long as you’ve had regular income over the last year.

The lender will check your employment, usually by asking you for a letter from your employer which is signed and states how long you have been on the job and how much money you earn. If you’re self-employed, or if you’ve been at your job less than two years, the lender may ask you for additional information (such as federal income tax statements) concerning your income and work history.

These are the kinds of questions a lender considers when reviewing your loan application:

  • Have you been at the same job for at least two years?
  • Have you been in the same occupation for at least two years?
  • Have you had gaps in your income over the last two years?
  • How long do you expect to stay in your current job?
  • Is the co-borrower (if any) employed?
  • If either you or the co-borrower lost your job, how long would you be able to make your mortgage payments?

 

Your Credit History

Good credit is very important in qualifying for a loan. In addition to your ability to pay (as indicated by your debts and income), a mortgage lender will look at your willingness to pay. This will be judged by your credit record – that is, how well you’ve paid your loans and other debts in the past.

When you apply for a loan, the lender will order a credit report for you. It’s a good idea to order a copy of your credit report before you apply. It will show your record of payments on loans, charge cards and other similar debts. If you’ve never had a loan or a charge card, you can show that you have a good record of payment on your utility bills and rent.

Your Property’s Value

When you choose a home, the lender will want to know that the house is worth the price you plan to pay. In fact, the loan amount that the lender approves for you will be based on the value of the property. The value of the property is a lender’s best assurance that they can recover the money they lend you – even if you stop making mortgage payments. If you stop making payments, the lender has the right to sell your home to pay off the loan – a process called “foreclosure”. The lender wants to know that the property could be sold at a price that’s worth the loan amount.

If you decide to sell your home before you’ve finished paying off your mortgage loan, you’ll want a price that allows you to pay back the loan balance (and perhaps make a profit as well). That’s why it’s important to have a professional appraisal of the value of your home.

 
Mortgage Types

 

Fixed Rate VS Variable Rate

A fixed rate loan has the same interest rate for the entirety of the borrowing period, while variable rate loans have an interest rate that changes over time. … In general, variable rate loans have lower interest rates and can be used for affordable short term financing. if the borrowers decide to pay off their mortgage prior to maturity date they have to pay the penalty, for the Variable mortgage the penalty is 3 months interest and for the Fixed Rate the penalty is greater or 3 months interest penalty or IRD ( Interest Rate Differential).

Open VS Closed Mortgage

An open mortgage gives homeowners the flexibility to pay off their mortgage at any time. A closed mortgage is little more strict — if you pay it off before the mortgage term ends, you have to pay a penalty. Open mortgage rates are usually higher than closed mortgage rates.

Pre-approval VS Approval

pre-approval is a non-binding statement saying, based on a cursory review of your unverified financial status, that you are eligible for a loan up to a certain amount. … The approval is the process of obtaining a specific loan on a specific property for a specific amount.                                             Please remember Pre-approval is not approval.

AMORTIZATION PERIOD:
The actual number of years it will take to pay back your mortgage loan. Generally speaking most mortgages have 25 year amortization schedules but with a 20% down payment, consumers can have 30 and even 35 year amortizations to help reduce their payment.

High Ratio VS Conventional Mortgage

First, the definitions. A conventional mortgage is a loan for up to 80% of the appraised value or purchase price of a property. A highratio mortgage is a mortgage in which a borrower places a down payment of less than 20% of the purchase price on a property.

Stress Test

The stress test makes sure that you can still make your mortgage payments even if interest rates go up. Your stress test results determine whether you qualify for the mortgage you want. The stress test applies to all homebuyers, even when they are making a 20% down payment.

Current stress test rate—at 4.94%

AMORTIZATION PERIOD:
The actual number of years it will take to pay back your mortgage loan. Generally speaking most mortgages have 25 year amortization schedules but with a 20% down payment, consumers can have 30 and even 35 year amortizations to help reduce their payment.

GDS RATIO (Gross Debt Service Ratio):
The percentage of gross annual income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, condominium fees or pad rent.

TDS RATIO (Total debt service ratio):
The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards.

Loan-to-value Ratio – this is another typical financial calculation that is done is called the Loan-to-Value (LTV) ratio. This calculation is done by dividing the amount of the mortgage by the value of the home. Lenders will generally require the LTV ratio to be at least 80% in order to qualify for a mortgage.

Open vs closed mortgages to prepayment

An open mortgage  is best suited for those who plan to pay off or prepay their mortgage loan without worrying about prepayment charges. It allows you the freedom to put prepayments toward the mortgage loan anytime until it is completely paid off. An open mortgage may have a higher interest rate because of the added prepayment flexibility, and can be converted to any fixed rate term longer than your remaining term, at any time, without a prepayment charge.

A closed mortgage  provides the option to prepay your mortgage loan each year up to 15% of the original principal amount. If you want to pay your mortgage loan off completely before your term ends, prepay more than 15%, or pay off your mortgage loan balance before the end of its term, prepayment charges may apply. A closed mortgage typically has a lower rate than an open mortgage for the same term

Mortgage Default Insurance

CMHC Insurance

Content last updated: April 30, 2020

Mortgage default insurance, which is commonly referred to as CMHC insurance, is mandatory in Canada for down payments between 5% (the minimum in Canada) and 19.99%. Mortgage default insurance protects lenders, in the event a borrower ever stopped making payments and defaulted on their mortgage loan.

Although mortgage default insurance costs home buyers 2.80% – 4.00% of their mortgage amount, it does allow Canadians, who might not otherwise be able to purchase homes, access to the Canadian real estate market. Without it, mortgage rates would be higher, as the risk of default would increase. Lenders are able to offer lower mortgage rates when mortgages are protected by mortgage default insurance, because the risk of default is passed along to the mortgage insurer.


Qualifying for mortgage default insurance

There are some requirements you have to meet in order to qualify for mortgage default insurance:

  • The maximum amortization for insured mortgages is 25 years.
  • If the purchase price is between $500,000 – $999,999 a higher down payment is required. The minimum down payment is 5% of the first $500,000, and 10% of the remaining amount.
  • Mortgage default insurance is not available on homes purchased for more than $1 million; this means that a 20% down payment is required on these homes.

Genworth 

Genworth’s premiums are identical to those offered by CMHC, but their qualification criteria are slightly different. For example, newcomers must have at least 3 months of employment history in Canada and their down payment cannot be a gift. A newcomer has to prove they can save the money for a down payment themselves, which is another way for the lender to gauge the risk of lending to someone without a credit history.*Genworth Financial also offers mortgage default insurance to newcomers who have a down payment that is greater than 20% of the home’s purchase price but a weaker credit history in Canada.

Canada Guaranty Mortgage Insurance

Canada Guaranty Mortgage Insurance is the only 100% Canadian-owned private mortgage default insurance company. Canada Guaranty offers mortgage default insurance to newcomers who have arrived in Canada within the last 5 years, through their Maple Leaf Advantage™ product.

Credit Score

It’s pretty easy to track your credit score these days⁠—perhaps through a paid subscription to Equifax Canada or Trans Union Canada, or through free offerings from your bank, or other entities such as Borrowell, Credit Karma, Mopolo or Mogo.

But there is no consistency among these various sources. In fact, there can be dramatic differences. Therefore, you should focus more on your overall “credit hygiene” rather than any one particular score. Meaning, focus on best practices at all times. More on that later.

CBC News ran a solid investigative piece last fall called “Why 4 websites give you 4 different credit scores and none is the number most lenders actually see.” One Canadian encountered a 200-point difference between his highest and lowest scores from several score providers!

Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates Inc., thinks Canadians are obsessed with their credit scores. He is perhaps jaded by having met thousands of insolvents, many of whom had high credit scores.

Terrio notes, “It’s also important to remember that the credit score you see might not be the one the bank sees. That’s right. Lenders can (and do) order credit reports that are designed to meet their specific needs.”

What is their merit then? What exactly are people tracking? What does it even mean when someone tells you what their credit score is?

How Useful Are Free Credit Scores When Applying for a Mortgage?

To bring the conversation around to mortgage borrowing, the only credit score that matters is the one your lender sees when your application is submitted. And it’s almost certainly NOT a score you have seen for yourself from all the score providers out there.

These days, prospective mortgage clients are often excited to tell me what their credit score is. I bite my tongue, and instead applaud them for caring and for monitoring their credit, while explaining that, no, a screenshot of their Borrowell credit score is not sufficient for our mortgage lenders.

We actually need their signed consent to access a comprehensive (and completely different-looking) credit report.

FICO Score 8 is the Gold Standard

For the most part, mortgage brokers submit their mortgage applications with an Equifax Canada credit report attached. This report will display a few different measures to the lenders, but the one we pay the most attention to is called FICO Score 8. It’s the number we cite when a lender wants to know our mortgage applicants’ credit scores.

FICO says 90% of Canadian lenders use it, including major banks. But Canadian consumers cannot access their FICO score on their own.

Some banks and other mortgage lenders rely solely on the TransUnion credit report, which may use the Credit Vision Risk Score, and others use both reporting agencies. But they can all generate a FICO score.

Rob McLister, founder of RateSpy.com, picked up the cause last week with a short piece on the need to standardize the credit score that various providers of free credit scores offer. He wrote, “It’s time for companies hawking partly useful free scores (the Mogos, Borrowells and Credit Karmas of the world) to offer a more practical score. For mortgage purposes, FICO 8 is best of breed.”

Why You Should Worry About Your Credit Hygiene, Not Your Credit Score

I am delighted Canadians care about their credit history—it is so essential to many aspects of life, not just for major events like financing a home or an automobile. For example, some employers check candidates’ credit history, and so do most landlords when considering tenancies.

We are not here extolling the need for standardized credit score reporting. Because that is not going to happen anytime soon, as desirable as it may seem. Instead, we will talk about best practices of maintaining great credit hygiene.