How to get a mortgage: A guide to getting your first mortgage

Get familiar with the basics of getting a mortgage

When applying for a mortgage, lenders will evaluate several factors to determine your eligibility and the amount you can borrow. While there are dozens of factors, most lenders consider four key pieces of information during the mortgage application process.

1. Income

A steady job will positively impact your mortgage prospects. Lenders want to see that you have enough gross income to cover housing costs. The type of income you earn also affects your mortgage application:

• Employment income: Employment income is generally the best when trying to qualify for a mortgage. Lenders like a stable employment history demonstrating a consistent income — which is what full-time employment offers. Lenders want to see that you’ve been employed for at least three months at your current job. Regardless of how long you’ve been employed, some lenders will ask for a letter of employment in order to qualify for a mortgage. This letter is an official document from your company’s human resources department that states your job title, the length of time you’ve been employed and your current salary.

• Self-employed income: Qualifying for a mortgage can be harder for self-employed individuals. Lenders typically consider self-employment income less stable than employment income, and you’ll need to show a longer period of income stability. Most lenders require at least two years of tax assessments for a self-employed person to qualify for a mortgage.

• Rental property income: Many home buyers will consider a mortgage helper — a rental suite within your primary residence — an added benefit. The extra income from the rental can help pay the mortgage. However, lenders do not consider the rental income from a mortgage helper the same as income earned through employment. While regulations allow lenders to include up to 100% of rental income, many lenders only allow a percentage of rental fees to be included as part of your income when applying for a mortgage. If you are considering a home with a mortgage helper, it’s best to work with a mortgage broker with experience finding mortgages for this type of property.

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2. Debt

Lenders will consider the debt you carry and compare this to the income you earn. A higher debt load relative to your income is less favourable since it shows that more money you earn is being used to repay current debt. In Canada, lenders calculate the debt versus income ratio using two key debt ratios:

• Gross debt service ratio (GDS): The percentage of your gross household income used to cover housing costs like mortgage payments, property taxes, heating, and a portion of condo fees. This shouldn’t exceed 39% of your income.

• Total debt service ratio (TDS): Encompasses all monthly debt obligations, including housing costs and other debts, as a percentage of your gross income. This shouldn’t exceed 44% of your income. These ratios will be stress-tested at a higher interest rate to ensure you still meet thresholds.

3. Credit score

Under most circumstances, a home buyer can find a mortgage if their credit score is 660 or higher. However, most lenders will look for a credit score of 680 or higher. Higher scores help you qualify for better mortgage rates and a larger mortgage loan. This is critical since a lower mortgage rate can reduce the monthly repayment you are required to make.

4. Down payment

A conventional mortgage in Canada requires you to put 20% of your money into purchasing a home — a down payment.

Home buyers with less than 20% as a down payment need to apply for an insured mortgage — also known as a CMHC mortgage or a high-ratio mortgage. By federal regulations, an insured mortgage means the lender is required to obtain mortgage default insurance. The borrower pays for the cost of this insurance, but the insurance is used to protect the lender should the borrower default and not repay the mortgage loan.

A larger down payment often means a better chance at qualifying for a mortgage, typically at more competitive rates and terms. It signals to the lender that you are committed to paying off the debt, have more skin in the game, and are less likely to default on your loan.

High ratio mortgage

You will apply for a high-ratio mortgage anytime you put less than 20% as a down payment on a property purchase. Under federal regulations, a high-ratio mortgage requires mortgage default insurance. However, not all home purchases qualify for a high-ratio mortgage. Any property sold in Canada that exceeds a purchase price of $1 million is not eligible for mortgage default insurance and — in most cases — a high-ratio mortgage.

How much home can you afford?

Whether you're hunting for a new home or looking to refinance your mortgage, knowing how much your new loan might cost you is critical. Use our handy mortgage calculator to help you understand what your payments could look like.

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Documents required to get a mortgage

Lenders require documentation to verify your identity, income, assets, debt obligations, etc. When applying for your first mortgage, be prepared to provide:

• Government-issued photo ID and your social insurance number (SIN) number
• Recent pay stubs or tax returns to confirm income
• Bank statements and investment account statements showing asset and debt balances
• Divorce decree or child support documents, if applicable
• Property details and listing information
• Eligible mortgage guarantor’s financial information, if applicable

Having these documents ready will help streamline the mortgage application process and ensure lenders have all the necessary information to assess your eligibility.

Letter of employment for mortgage

An employment letter is an official letter from your employer that confirms your job title, length of employment, and current annual income. Lenders use this to verify your employment details.

Credit history

Your mortgage lender will perform a hard credit check — a check against your credit history that is recorded and can be seen by other creditors. Your credit history details your record of repaying debts, including credit cards and loans, and offers details about your payment history. Most lenders require a minimum credit score for borrowers to qualify for a first mortgage. In most cases, the minimum credit score to be approved for a conventional mortgage in Canada is 680. Borrowers with credit scores as low as 600 can find lenders; however, they will be charged higher mortgage rates.

Proof of down payment

The lender wants evidence that you have sufficient funds for the full down payment amount, along with a paper trail on the source of these down payment funds. When providing documentation, lenders will accept bank records and official documentation for the following:

• Personal savings or investments held in bank accounts, RRSPs, FHSA, etc
• Equity from the sale of another property
• Gift funds from relatives, which require a gift letter stating it's not a loan
• Borrowed funds from a secured line of credit like a home equity line of credit (HELOC)

5 easy steps to getting a mortgage

1. Check your credit reports and dispute any errors that could hurt your score
2. Get pre-approved for a mortgage by providing financial and employment information to a lender or work with an independent mortgage broker for more options
3. Talk to a mortgage broker about the best mortgage options for your needs
4. Once you have an accepted offer on a property, contact your mortgage broker to confirm what paperwork you need to submit
5. Formally apply for the mortgage by submitting all required documentation

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How long does mortgage approval take?

The full underwriting process can take a day to several days, but most mortgage approvals take three to five business days. This timeframe starts when you submit your formal mortgage application and all supporting documentation. Being prepared with all documentation will speed up the approval process, and getting pre-approved can also speed up the process.

Key factors that influence mortgage approval time

• How quickly do you provide all required documentation upfront
• Whether the lender uncovers any issues that need additional verification
• The current volume of mortgage applications the lender is processing

Easiest bank to get a mortgage in Canada

The easiest bank to get a mortgage from in Canada depends on your preference for application. If you prefer online applications without visiting a branch, options like Tangerine, Simplii, and Equitable Bank can streamline the process. Otherwise, Canada’s big five banks offer robust branch networks with comfortable in-person applications.

Credit unions are another easy way to get a mortgage in Canada. This is because they have more flexibility with the application process. A bank has more mortgage requirements, including a mandatory stress test. This means a credit union can often have better terms and approvals for specific situations that banks do not treat favourably. This can include better options for self-employed people.

Otherwise, an online mono-lender like Pine and Nesto can streamline the mortgage application process. They also generally provide the lowest rates. As mentioned above, a lower interest rate increases approval likelihood since it decreases monthly mortgage payments.

Don’t stop at the bank when shopping for a mortgage

Most home buyers tend to limit their comparison shopping to just banks, when shopping for the most competitive mortgage rate. However, this limited search means the elimination of over 100 mortgage lenders — many with far more competitive rates and terms than what is offered by the big banks.

To avoid disappointment, be sure to speak to an independent mortgage specialist. For instance, Homewise is a digital one-stop homebuying portal that offers access to mortgage brokers who work with more than 30 lenders, plus a robust network of real estate agents, lawyers and notaries as well as real estate professionals that can help you during every step of your property buying process.

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Bottom Line

Getting your first mortgage requires preparation and organization. These simple steps can help you prepare for the process and increase your chance of getting the best mortgage rates at favourable terms.