How Do I Know If I’m Eligible for a Mortgage?
You dream of owning a home, but reality sets in when you realize you’re short on cash to buy a house outright. That’s where a mortgage comes in—it helps you purchase a home even if you don’t have all the money upfront. But how do you know if you’re eligible for a mortgage? What do lenders look for before they say yes?
In this blog, you’ll explore the key factors that determine whether you qualify for a mortgage and how you can get ready to make your dream of owning a home a reality.
Eligibility Checklist: What You Need to Qualify for a Mortgage?
Credit Score
Your credit score is the first thing your lender will check. It is like a report card that shows how well you’ve managed money in the past. This score is based on things like whether you’ve paid bills on time, if you have any debts, and how much you owe.
In Canada, credit scores are calculated by agencies like Equifax or TransUnion. Generally, scores range from 300 to 900, and a higher score is better. Here’s how credit scores affect mortgage eligibility:
- A high credit score (750 and above) shows lenders that you are responsible with money, making it easier to get a mortgage.
- A low credit score (below 600) may make it harder to get approved, and you may face higher interest rates.
How to check your credit score? You can request a free copy of your credit report online through Equifax or TransUnion to make sure there are no mistakes.
Your Earnings
Lenders are providing you with the loan, so they want to ensure you can pay it back. They will look at how much money you make from your job or business. This may include your salary, bonuses, revenue from the sale of goods & services, and other income streams.
What does this mean for you? If you have a steady income, it will be easier for you to show the bank that you can handle the mortgage. The more you make, the more likely you are to get approved. So, if you’re not quite there yet, you may want to focus on saving up for a bit longer.
Your Expenses
Lenders also want to know what you spend your money on. This includes your bills, food, entertainment, and any other regular expenses you have. Mortgage lenders and banks look closely at your debt-to-income ratio. They will compare your monthly income to your monthly debt payments to determine how much of a loan you can afford.
For a residential mortgage, your Gross Debt Service (GDS) ratio should be no more than 39% of your gross (before taxes) income. This ratio is calculated based on your mortgage, property taxes, heating costs, and 50% of your condo fees, if applicable.
For Example:
If you earn $3,000 per month before taxes, and your monthly housing costs (including mortgage, property taxes, heating costs, and 50% of condo fees) total $1,170, your GDS ratio would be 39%, which is within the acceptable range.
If you owe $1,200 on other loans (such as credit card debt or car loans), your total debt load would be the sum of your housing costs ($1,170) and your other debts ($1,200), making your total monthly debt payments $2,370. Your Total Debt Service (TDS) ratio is 79%, which is higher than the preferred 44%. This high ratio may cause a bank to hesitate in approving your mortgage because it indicates you may have too much debt to manage.
Down Payment
When you buy a home, you need to pay a portion of the house price upfront. This is called a down payment. Typically, a down payment is around 5% to 20% of the home’s price. The bigger your down payment, the better.
Let’s say you want to buy a house worth $100,000. A 5% down payment would be $5,000. If you have more savings, like a 20% down payment, that would amount to $20,000.
Why does this matter? The more money you can put down, the less you need to borrow, and the more likely the bank is to approve your mortgage. It results in lower monthly payments for you and provides ease of mind!
Stress Test
The Stress test is required for all residential mortgages. This test is meant to make sure you can still afford your mortgage payments if interest rates go up.
Even if your mortgage rate is low, the lender will calculate your mortgage payments based on a higher interest rate (usually 5.25% or the Bank of Canada’s benchmark rate plus 2%). This ensures that you can manage payments if rates rise.
If you can pass the stress test, you’re more likely to be approved for a mortgage.
The Property Itself
The type of property you’re purchasing also impacts your eligibility. The lender will want to make sure the home is in good condition and can be sold if you can’t repay the loan. They will look at factors like the age of the house, its location, and its overall value.
The lender will also assess whether the property is located in a stable neighbourhood and if it meets safety and zoning standards. Additionally, they may consider whether the property has features that could make it more attractive to future buyers, such as a large yard or modern amenities.
Your Job Stability
Lenders want to see if you have a stable job. They want to make sure you’ll have regular income to make your mortgage payments. If you’ve had the same job for a while, or if you have a reliable source of income, it shows the bank you’re in a good position to handle a mortgage.
Why does this matter? Banks prefer borrowers who have steady work because it means you’re less likely to miss payments. If you’ve recently switched jobs, the bank might ask for more information to make sure your new job is stable.
Closing Costs
- Property Transfer Tax: In British Columbia, you must pay a property transfer tax when you buy a home. The tax is calculated as follows:
- 1% on the first $200,000 of the purchase price.
- 2% on the portion between $200,000 and $2,000,000.
- 3% on the portion above $2,000,000.
- For homes over $3,000,000, an additional 2% applies on the portion above that amount. If you’re a first-time homebuyer, you may qualify for a First-Time Home Buyers Property Transfer Tax exemption or reduction, depending on the price of the home.
- Home Inspection Fees: It’s a good idea to have a home inspected before you buy it. A professional home inspector can check for hidden problems, and the fee usually ranges from $300 to $600.
- Legal Fees: You will need a lawyer to handle the legal aspects of buying a property. Legal fees for this process in British Columbia can range from $500 to $1,500, depending on the complexity of the transaction.
- Title Insurance: Title insurance protects you if there are any issues with the property’s ownership. It can cost between $200 to $400.
- Appraisal Fees: Sometimes, the lender will require a property appraisal to make sure it’s worth the price you’re paying. This can cost between $300 to $500.
Get Pre-Approved for a Mortgage
Before starting to search for a home purchase, it’s best that you get pre-approved for a mortgage. The bank will check your financial situation and tell you how much they are willing to lend you. Doing so will make your sellers believe that you’re serious about buying. It also helps you understand exactly how much you can afford to spend on your dream home.
Government Programs for First-Time Homebuyers
In Canada, various government initiatives can help you qualify for a home mortgage. These are:
1. First Home Savings Account (FHSA)
The FHSA is a tax-advantaged savings plan that allows first-time homebuyers to save up to $8,000 each year, with a maximum lifetime contribution of $40,000. Contributions are tax-deductible, while withdrawals for property purchases are tax-free. To be eligible, you need to be a Canadian resident, at least 18 years old, and purchase a home for the first time.
2. Home Buyers' Plan (HBP)
This program lets first-time buyers withdraw up to $60,000 from their Registered Retirement Savings Plan (RRSP) without tax penalties to purchase a home. Repayment begins after five years, and buyers have up to 15 years to repay the amount.
3. First-Time Home Buyers' Tax Credit
First-time buyers can claim a tax credit of $10,000 when filing their taxes, providing a maximum rebate of $1,500. This credit is aimed at offsetting some costs associated with purchasing a home.
4. GST/HST New Housing Rebate
Buyers of new or self-built homes can claim a rebate on a portion of the GST or HST paid. This program is designed to reduce the tax burden for new homeowners and involves submitting relevant applications and supporting documents.
5. CMHC Eco Plus
This rebate program provides up to 25% off mortgage insurance premiums for energy-efficient homes that meet specific standards, such as LEED certification or Energy Star ratings. Applications must be submitted within 24 months of the mortgage’s closing date.
6. Regional Down Payment Assistance Programs
Many provinces and municipalities offer assistance to buyers who may not qualify for federal programs. For example, Prince Edward Island offers interest-free alpha loans of up to 5% of the purchase price, while Manitoba has programs aimed at rural areas.
Please note: Each program has specific eligibility criteria, and details may vary based on location. Consulting a mortgage specialist or checking provincial resources can help you identify the most suitable options.
Conclusion
Knowing if you’re eligible for a mortgage might sound confusing at first, but now you know the main things banks look at: your credit score, income, debt, down payment, and more. The most important thing is to take it one step at a time and make sure you are in a good financial position.
Remember, buying a home is a big decision, but with some planning and the right preparation, you’ll be ready. Talk to a mortgage broker for more guidance—they can help you understand your options and make the process smoother.
Good luck on your journey to homeownership—you’ve got this!
Alpha Mortgage House Corporation is a Mortgage Broker in Surrey, BC. We provide mortgages for Home Purchases, Project financing, Second mortgages, Commercial mortgages, Mortgages for first-time home buyers and more. Alpha Mortgage is a one-stop solution for all your mortgage needs. Our team works with top lenders to provide you with the best financial options.