When the housing market is racing along, getting a mortgage can seem like a fairly easy thing to do. But getting approved for a mortgage is a multi-step process that can require a fair amount of participation on your part. Knowing how to apply for a mortgage can make that process less stressful.
To apply for a mortgage, you’ll need a solid idea of what you can afford, financial documentation like tax returns, bank statements and proof of employment, and at least an hour or two of uninterrupted time.
Here are the general steps to follow when applying for a mortgage in Canada.
6 steps to apply for a mortgage
Step 1: Get your credit in order
The first step in the mortgage application process is to make sure your credit report is error-free and your credit score is high enough to meet lender requirements.
You can order a credit report and credit score from providers like Equifax, TransUnion or Borrowell. Look through the entire report carefully and make sure there are no errors.
If your credit score is low consider taking some extra time to work on building it up. A poor credit score can mean having to make a higher down payment, paying a higher interest rate, or even having your mortgage application denied.
Step 2: Get an idea of what you can afford
It’s best to figure out how much home you can afford before putting in an offer on a house. You can estimate your budget by completing a mortgage pre-qualification, a simple, online calculation that can give you a general idea of how much a lender may be willing to loan you, or by plugging some numbers into a mortgage affordability calculator.
When determining mortgage affordability, you’ll have to consider:
- Your pre-tax income.
- Your living expenses, including utilities.
- Any existing debts.
- The amount you borrow and the subsequent monthly payments.
- The amortization period.
- Closing and moving costs.
The above checklist is similar to the one potential lenders use when evaluating your ability to pay back loans of various sizes.When you apply for a mortgage, the lender will also evaluate you against a mortgage stress test to ensure you’ll be able to afford your mortgage payment if interest rates increase.
Step 3: Choose a mortgage type
A mortgage isn’t one-size-fits-all, which means you will have to determine which type of mortgage best suits your needs and your lifestyle. Some of the main things to consider include:
- Term. The mortgage term is the length of time your mortgage contract is in effect before you need to renew. Terms can range from a few months to 5 years or more. You will likely have multiple terms throughout your mortgage.
- Amortization period. Longer amortization periods, such as a 30-year mortgage, mean lower payments, but you end up paying more in interest.
- Type of interest rate. Fixed interest rates stay the same throughout the entire mortgage term while variable interest rates can fluctuate throughout the term.
- Payment frequency. This can range from monthly to weekly with several accelerated options as well.
- Open or closed mortgage. Open mortgages may offer more flexibility to pay off your mortgage but usually have higher interest rates, while closed mortgages may have lower interest rates but less payment flexibility.
These are important decisions to make, but don’t feel as if you need to make all of them before reaching out to a lender or mortgage broker. It’s their job to make sure you understand each element and the implications of choosing one option over another.
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Step 4: Compare mortgage lenders
When you have a general idea of how much you can afford and what type of mortgage you would like, it’s time to shop around and compare mortgage lenders. You’ll want to compare mortgage products, fees and interest rates and also learn more about the application process. For example, do they offer online applications?
One way to do this is by comparing lenders directly. This means investigating the current mortgage offers at Canada’s banks or credit unions to compare rates and loan features. A lot of this work can be done from the comfort of your home online. You can also use a mortgage rates comparison page to get a sense of what your options are.
A second strategy is to work with a mortgage broker who will do all this legwork for you. A broker will compare the mortgage products and rates offered by a number of lenders and find the best options for your needs. Mortgage brokers are professionals, but if you plan on hiring one, do your due diligence to ensure you get someone who has the experience and good reviews to back their work.
Step 5: Apply for a mortgage pre-approval
Once you have found a lender with the mortgage product you’re looking for, it’s time to get a mortgage pre-approval.
Getting pre-approved means that you’ll know the maximum amount of mortgage you could qualify for. This allows you to estimate your monthly payments and ensure they line up with what you can afford. It also tells sellers that a lender is willing to fund the offer you’ve put in on their house.
When you’re pre-approved for a mortgage, the interest rate can be locked in for up to 120 days, depending on the lender. If rates increase during your pre-approval period, you’ll still have access to the rate your were originally offered. And if rates decrease, you should be able to renegotiate.
To apply for mortgage pre-approval you will need to provide documents showing:
- Proof of employment.
- Proof that you can afford the down payment and closing costs.
- Information about all your other personal assets.
- Information about your debts.
Your lender will also look at your debt service ratios and do a credit check. It’s also worth trying to negotiate with your lender at this stage, especially if you have a strong application. You may be able to get yourself better rates than those originally offered.Once you’ve been pre-approved, you can finally start searching for a home.
Step 6: Your actual mortgage application
You won’t actually apply for a mortgage until you’ve found a home you like, put a bid on it and had that bid accepted by the seller. Then it’s time to get serious.
Your official mortgage application will feature a process similar to the one you went through during pre-approval. Your finances will be looked at again to ensure they’re as strong as they were when you were pre-approved. You’ll also have to get a home appraisal done to ensure that your lender isn’t funding a wild overpay.
Pre-approvals are not legally binding, so even if you’ve been pre-approved for a certain amount, things can always change at the last minute. Based on the condition or location of the home you’ve purchased, for example, your lender may not agree to loan you the previously offered amount. When this happens, you have a few options:
- Provide a larger down payment to reduce the loan amount.
- Try to negotiate a lower rate.
- Inquire about a longer amortization period, which will result in lower monthly mortgage payments.
- Apply with a co-signer.
- Apply for a mortgage at a B lender, which may offer higher loan amounts in exchange for higher interest rates.
If you are struggling to find a traditional mortgage that you can qualify for, you can also look to a private lender for a mortgage. Typically, you only go to a private lender if you can’t be approved by an A or B lender. Private mortgages are often short-term mortgages with high interest rates that can be helpful if you are stuck, but they do come with more financial risk. Should you need to resort to a private lender, an experienced mortgage broker can point you in the right direction.
Frequently asked questions about how to apply for a mortgage
For lenders to assess your credit-worthiness, they will ask for information related to your employment, income and assets, as well as your credit score and debt levels. You’ll have to consent to a credit check and provide documents like pay stubs, employment letters and notices of assessment from the Canada Revenue Agency.
You don’t have to get pre-approved to get a mortgage. But it is generally advisable to get pre-approved so you have an idea of how much you’ll be able to borrow. If you don’t get pre-approved and put in an offer on a home that is beyond what lenders will loan you, you’ll still be legally obligated to buy the home — even if no one will approve the mortgage you need.
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