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Published November 10, 2022

How Much Mortgage Do I Qualify For?

The mortgage amount for which you’ll qualify depends on your affordability, supporting documentation, and the lending institution’s approval process.

If you’re like many Canadian home buyers, you’re going to rely on a mortgage to help finance your home purchase. One of the first questions you’re bound to ask yourself is, “how much mortgage do I qualify for?”

To begin on your journey to answering that question, it’s important that you first understand the difference between what you can qualify for and what you can afford. A mortgage lender will collect certain pieces of financial information from you to capture a maximum amount you can qualify for, but only you can determine the monthly payment you can comfortably afford. 

What you need to qualify for a mortgage in Canada

To qualify for a mortgage you need to be able to prove to the lender that you can afford it and that you have a good chance to pay the loan back. To determine if you can afford it and that you’re worth the risk, lenders will examine the following: 

Sufficient income

Lenders need to see evidence that shows you have a stable and substantial enough income. You can show proof of income through a letter of employment from your company and recent paystubs. 

Note: Not all income is seen as equal in a lender’s eyes. It can be easier to apply when you have a salaried position as opposed to a self-employed income stream. Similarly, the longer you have been employed the better. Ideally, you will have at least two years of stable work history at the same company to prove your income. 

Ample credit score and history

Your credit score and credit history also play a huge role in qualifying for a mortgage. A high credit score proves to lenders that you are someone who has reliably been able to take on debt and consistently pay it off. A high credit score also helps ensure you can qualify for the best mortgage rates

A minimum down payment

In Canada, down payments can be a minimum of 5% (for homes under $500,000). That said, if your down payment is less than 20%, you will be required to purchase mortgage loan insurance. A higher down payment means having to borrow less, and that translates into a lower monthly payment making it easier to qualify for a mortgage.

Controlled debt service ratios

Your debt service ratios are another important element that help answer the question of, “how much mortgage do I qualify for?” Lenders need to ensure that your mortgage debt won’t take up too much of your monthly income. 

There are two debt service ratios lenders will calculate: total debt service (TDS) and gross debt service (GDS) ratio. The difference is your TDS looks at all your monthly expenses plus your monthly housing costs in relation to your monthly income. In order to qualify for a mortgage, the Financial Consumer Agency of Canada recommends that your GDS be under 32% and your TDS be under 44%. 

These debt service ratios will be used in the stress test that lenders use to assess whether you can afford mortgage payments should interest rates increase. To qualify for a mortgage, you will need to pass the stress test. 

Mortgage qualification example

Scenario 1:

Let’s say you have monthly income of $5,000, and you want to buy a house that costs $250,000 with a 20% down payment ($50,000). To determine how much mortgage you might qualify for, lenders would consider financial obligations such as:

  • Estimated heating costs: $150/month.
  • Estimated property taxes: $200/month.
  • Monthly credit card payments $100/month.
  • Monthly car payment: $350/month.

In this simplified scenario, you will likely qualify for the needed mortgage amount of $200,000.00, since your GDS ratio (30.84%) does not exceed 32.00% and your TDS ratio (39.84%) does not exceed 40.00%.

Scenario 2:

Now let’s say you have monthly income of $5,000, but you want to buy a house that costs $350,000 with a 10% down payment ($35,000). Because your down payment is less than 20%, you’ll have to pay for mortgage insurance. To determine how much mortgage you might qualify for, lenders would consider financial obligations such as:

  • Estimated heating costs: $150/month.
  • Estimated property taxes: $200/month.
  • Monthly credit card payments $100/month.
  • Monthly car payment: $350/month.

In this simplified scenario, you will be denied the needed mortgage amount of $324,765 ($315,000.00 + $9,765.00 in mortgage insurance premiums), since either your GDS ratio (45.71%) exceeds 32.00% or your TDS ratio (54.71%) exceeds 40.00%.

Use the FCAC’s mortgage qualifer tool to experiment with different income, debt and mortgage amounts, estimate likelihood of qualification.

Basic mortgage qualification steps

To help you begin to get a sense of how much mortgage you can afford, before ever having to talk with a mortgage lender, try the following: 

Determine how much more debt you can handle

Determine how much money you make each month versus how much you’re spending each month.

This calculation should include all your recurring expenses such as rent or current monthly mortgage payment, installment loans like an car loan, credit card payments, money you’re already saving for important life events like retirement savings, a wedding, a vacation, or raising kids.

Once you have all your monthly expenses added up, you’ll get a sense of how much of your monthly income is spent on repaying debt and recurring expenses. You’ll also get a sense of how much more debt you can comfortably take on each month. For example, if your new monthly mortgage payment will be double the cost of your rent, can you still afford it?

Clean up your credit

Before engaging with a lender, be sure to check your credit score and credit report to make sure there are no errors or signs of fraud. If your credit score needs improving, be sure you take the time to improve your score since the higher your score, the lower the interest rate you can qualify for.

Get prequalified

To get a more accurate understanding of how much mortgage you can afford, you’re going to need to speak with a mortgage lender eventually. An informative and less formal way to understand the amount of mortgage you can afford is to get prequalified with a lender. 

The lender will do a basic analysis of your financial situation, including documenting your income, assets, and debt. Pre-qualification is a more casual process compared to a mortgage preapproval since there is no hard credit check done and nothing is set in stone. 

This is also the time to discuss loan options with a lender, since different types of mortgages come with different cost structure and serve some better than others.  

Already qualified? Move on to mortgage pre-approval

Mortgage pre-approval is an important step if you’ve already been pre-qualified, and are serious about buying a home within the next few months.

The pre-approval process is longer and considerably more detailed than prequalification, but the end result is a preapproval letter that states a maximum amount you can borrow at a specific interest rate. Preapproval letters tend to only last for a couple months since rates and market conditions are always changing.

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