Getting approved for your first mortgage as a newcomer in Canada

At some point in their lives, everyone strives to buy a home.

This is especially true for newcomers to Canada, who often come to this country for added stability and comfort in their present-day lives and their future.

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Buying a home is a big part of that journey, but there are several things that newcomers must understand before they can apply for their first mortgage in Canada. What follows will answer five of the most important questions related to getting approved for a mortgage in Canada.

What is a mortgage?

A mortgage is a loan agreement provided by a lender, used by the recipient to purchase a home, piece of land or other type of real estate. Mortgages give the lender the right to repossess (take back) the loan recipient’s property if they fail to repay the money borrowed (plus interest).

What is a mortgage pre-approval and how does it work?

A mortgage pre-approval, otherwise known as a mortgage pre-authorization or pre-qualification, is an assessment of a potential homebuyer's borrowing capacity and the interest rate the lender is likely to charge. Mortgage pre-approvals help Canadians understand their potential borrowing capacity and interest rate affordability.

Note: Final approval for a pre-approved mortgage is typically dependent on the mortgage seeker receiving a fuller assessment of their financial situation by the lender, who must feel confident that they can afford and pay back their mortgage.

During the mortgage pre-approval process, a potential lender goes through their own steps and criteria to:

• Determine the maximum amount of mortgage a recipient could qualify for (the maximum amount they are willing to lend you)
• Estimate the individual’s mortgage payments
• Secure an interest rate for a specific period, typically ranging from 60 to 130 days, depending on the lender

Completing a mortgage pre-approval requires that the prospective recipient provides the lender with their personal information as well as certain documents for assessment (more on that later). Mortgage pre-approvals also often involve a credit check, used to establish a home-buyer's trustworthiness for loan repayment.

Note: Obtaining a mortgage pre-approval does not guarantee your final approval for a mortgage

What questions should I ask during the pre-approval process?

When obtaining a mortgage pre-approval, it is important to ask as many questions as you need to so that you can be free of any uncertainty, especially before any documentation is signed.

It is your responsibility to ensure that you have clarity and confirmation about anything that is confusing. This will ensure that you and a potential lender establish a standard of clear communication.

A sample of key questions you may want to ask a potential lender include:

• How long is the pre-approved rate guaranteed?
• Will I automatically receive the lowest rate if interest rates decrease during the pre-approval period?
• Is it possible to extend the pre-approval if needed?
• How much should I be prepared to pay in total closing costs for this transaction?
• How much down payment will I need?

A quick internet search can give you a better idea of more questions you may want to ask a potential lender during the pre-approval process.

What documents do I need to provide when applying for a mortgage pre-approval?

At the mortgage pre-approval stage, potential lenders will need to review a loan seeker’s assets (what they own), their income and their debt.

Accordingly, the loan seeker will need to provide the following documentation to a lender:

• Identification
• Proof of employment (alongside proof of current salary/pay rate via a pay stub, for example, as well as your job title and tenure)*
• Proof of ability to cover mortgage down payment (e.g. recent financial statements from your bank account or investments) and closing costs
• Information regarding other assets you possess, such as a car
• Details about your debts or other financial obligations**

*Self-employed prospective homebuyers looking for a mortgage pre-approval must submit their Notice of Assessment from the Canada Revenue Agency over the last two years

**Your debts or financial obligations encompass monthly payments related to such things as:

• Credit card balances
• Child or spousal support
• Car loans
• Lines of credit
• Student loans

How is the amount of mortgage you get approved for calculated?

The calculation of an individual’s mortgage approval amount is partly based on the assessment of the loan seeker’s income, debt and monthly housing costs. Through this assessment, lenders use two general ratios – the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio to calculate how much a loan seeker will be approved for.

1. GDS

The Canada Mortgage and Housing Corporation (CMHC) mandates that one’s monthly housing costs (mortgage principal + interest, taxes and heating expenses*) cannot be more than 32% of their gross household income in a given month. Your GDS ratio is your monthly housing costs as a percentage of your gross monthly income.

*For condominium mortgage seekers, monthly housing costs also include 50% of monthly condo fees

2. TDS

The CMHC also mandates that one’s total monthly debt (credit card interest, car payments etc.) + housing costs cannot exceed 40% of their gross monthly income. Your TDS ratio is your total debt as a percentage of your gross household income.

These two ratios determine how much mortgage a loan seeker can qualify for.

6 key mortgage-related terms for Canadian newcomers

Mortgage Loan Insurance

Mortgage loan insurance is money paid to a lender - either up-front or monthly, if added to one’s mortgage - to protect them in the case that a mortgage recipient is unable to make their monthly payments in accordance with the mortgage agreement.

Premium

The cost of mortgage loan insurance; calculated as a percentage of your mortgage based on the amount of your down payment.

Down Payment

The amount of money a mortgage recipient puts towards the purchase of their home. This amount is deducted from the home’s purchase price.

Term

The length (number of years) that a mortgage contract will last.

Amortization

How long it will take to pay off your mortgage in full.

Closing Costs

The name given to the group of fees and costs that a mortgage recipient will need to pay once they secure a mortgage.

Closing costs can include such things as:

• Legal fees
• Appraisal fees
• Insurance

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