What factors into receiving a mortgage pre-approval?

Author: Gary Corriveau

The following four factors play a role in determining how large a mortgage, and at what rate, you will be pre-approved.

1. Credit Score

Your credit score is a measure of your financial health and shows lenders how risky it may be to lend you money. If your credit score is between 680 and 900, you will qualify for a mortgage with an “A” level lender, such as a major bank or other financial institution.

If your credit score is below 680 and above 600, lenders will look at the other details of your finances to determine if you can qualify with an “A” level lender or not. If you do not qualify, you will need to go through a “B” level lender to get a mortgage pre-approval.

If your credit score is below 600, you will only qualify for a mortgage with a “B” level lender and you will not get today’s best mortgage rates.

2. Down Payment

Your down payment is the lump sum of money you will put towards the purchase of your home. In Canada, the minimum down payment you must make is between 5% and 20% of the home’s purchase price (depending on the price). If you put down less than 20%, you will have to buy mortgage default insurance (also called CMHC insurance) to protect your lender in case you default on your loan.

The size of your down payment affects how much you can borrow.

For example, if you wanted to buy a house worth $300,000, you would need at least a $15,000 down payment. $300,000 x 5% = $15,000

Minimum down payments in Canada:

The minimum down payment in Canada is 5% for homes costing less than $500,000.

For homes priced between $500,000 and $1 million, you need to put down 5% of the first $500,000, then 10% of any amount over $500,000.

For example, a house worth $600,000 would require a down payment of at least $35,000.

($500,000 x 5% = $25,000) + ($100,000 x 10% = $10,000) = $35,000

For houses priced over $1 million, a 20% down payment is required.

3. Debt Service Ratios

Your debt service ratios are two calculations that lenders use to determine the largest monthly mortgage payment you can afford, based on your current monthly income, expenses, and debt. Lenders use these ratios to make sure you can afford to make your monthly mortgage payments, even with all of your other financial commitments, so there is a smaller risk that you could default on your mortgage payments.

4. Supporting Documentation

Depending on the mortgage broker or lender you sit down with, the documentation you will need to submit for your pre-approval may vary. For example, some mortgage brokers require proof of income for a pre-approval. Others will not require proof until your offer has been accepted and you need to finalize your mortgage application.

Here is a list of documentation you may need to provide for your mortgage pre-approval:

  • Identification (driver’s license and a passport)
  • Proof of income (pay stubs, a letter from your employer, or a notice of assessment if you are self-employed)
  • Length of time with an employer
  •  Proof of down payment (recent financial statements of bank accounts and investments)
  • Proof of source of funds for the closing costs (usually about 1.5% of purchase price)
  • Proof of any other assets like a car, cottage, or boat
  • Information about other debts including:
    • Credit cards or lines of credit
    • Spousal or child support payments
    • Student loans
    • Car leases or loans  
    • Personal loans