How do I qualify for a mortgage

As a first time home buyer, it can be confusing and stressful figuring out exactly what you need to qualify for a mortgage. So, we’re breaking it down for you so you can focus on all the other exciting stuff (like house hunting!). After all, your first time should be amazing.

When you’re getting a mortgage, lenders base your approval on factors about you and your credit history as well as the the property you’re buying. Your mortgage specialist will walk you through all the details and help you through the whole process, but we’re giving you a head start with this handy guide.

What you need…

Credit Score

Aim for a credit score of over 680. It’ll allow you to qualify for more in terms of your mortgage. That being said, there are lenders that will give you great rates for credit scores as low as 640, and on a case by case basis may go lower depending on other factors.

Canadian lenders have to follow specific rules for mortgages with a down payment that’s less than 20%. These rules are set by qualifying ratios called Gross Debt Service Ratio (GDSR) and Total Debt Servicing Ratio (TDSR).

• If your score is under 680, your max GDSR is 35% and your max TDSR is 42%

• If your score is over 680 you max GDSR is 39% and your max TDSR is 44%

• Higher credit scores get rewarded with an additional 4% GDSR and 2 % TDSR

These ratios determine your total income that can go to housing costs. By having a higher credit score, you can qualify for a better mortgage. We’ll explain these ratios in more detail in the ‘Income’ section.

Credit

When it comes to your credit history, lenders follow the ‘222 Rule’, meaning you need:

• 2 years of credit history (minimum)

• 2 forms of credit reporting on your credit bureau (like a line of credit and a credit card)

• And a total combined limit of at least $2,000 to show you can handle your finances

If you have anything in collections, make sure it’s paid prior to the mortgage funding. And, make sure you’re practicing good credit habits, like making your payments on time; lenders with the best rates don’t like to see multiple late payments.


Hot tip: One quick-ish way to get on track, is to fix your utilization ratio. Basically, maxing out your credit to the limit is bad in the eyes of the credit bureau. Set an imaginary limit of 70 per cent and don't go over that. Doing this will keep your credit score healthy. For example, if your credit card limit is $10,000, don't ever go over $7,000.

Income

Your income is important when you’re getting mortgage because lenders want to make sure you have the ability to pay the mortgage payments. Duh.

This is where those handy Gross Debt Servicing Ratio (GDSR) and Total Debt Servicing Ratios (TDSR) come into play.


Here’s how it works…

GDSR – Only 39% of your monthly income can go to your mortgage payment, taxes, heat and any mortgage fees.

TDSR – Takes that same ratio PLUS any other debts (like credit cards, line of credit, etc.) and can’t be more than 44%.

You’ll have to provide proof of your income when you’re applying for your mortgage. If you’re salaried that’ll be in the form of a letter on your company letterhead stating your work term and salary plus a current pay stub. If you’re hourly or self employed it’s slightly different, and you’ll need to submit your T4s.

Salaried

• Letter of Employment stating income and tenure, on company letterhead with the contact info for your manager or HR (dated within 30 days)

• Current pay stub

• If you receive a bonus, we will also need the most recent 2yrs of T4's

• Must not be on probation


Salaried + Commission

• Letter of Employment stating income and tenure, on company letterhead with the contact info for your manager or HR (dated within 30 days)

• Last 2 yrs T4's or Notice of Assessments (Notice of Assessment is the income tax receipt sent to your from CRA after you file your taxes. This will show your net annual income and the taxes owed (if any))


Hourly

• Letter of Employment stating income and tenure, on company letterhead with the contact info for your manager or HR (dated within 30 days)

• Current pay stub

OR – if your hours are not guaranteed, in addition to the above, you need to provide:

• Last 2 yrs T4's or Notice of Assessments (Notice of Assessment is the income tax receipt sent to your from CRA after you file your taxes, showing your net annual income and the taxes owed (if any)

• Must not be on probation


Self-employed

• Last 2 yrs Notice of Assessments (Notice of Assessment is the income tax receipt sent to your from CRA after you file your taxes showing your net annual income and the taxes owed if any)

• You must not owe any taxes to CRA. If you do, the lender will require proof by way of the "Statement of Account" document from CRA that this is paid before your closing date

AND one of the following for the past 2 years:

Sole Proprietor/Partnership

• Business License

CRA Notice of Return (confirmation of GST return)

• Or, Last 2 years T1 Generals with your statement of business activity. T1 Generals is your full tax return. If you are self employed, your taxes must be filed by an accountant

• Financial Statements signed by an accountant

Corporation

• If you are incorporated with a partner, our lender will require the "Notice of Articles" from your corporate binder showing the shareholders ownership percentage

• Articles of Incorporation for the last two years, prepared and signed by an accountant

There’s a bunch of other scenarios, so don’t worry if you don’t see yours above. Your dedicated mortgage specialist will go through everything in detail with you, for whatever income situation you’re in, to make it as easy as possible and make sure you’re supported along the way.

Down payment

• If the place you’re buying will be your principal residence, you’ll need a minimum of 5% down

• If you’re buying it as a rental property, you need at least 20% down.

Like your income, you’ll need to show proof of where your down payment is coming from. This could be in the form of a letter if it’s a gift, or bank statements if you’re using your RRSPs.

Savings/Investment

• 3 months of bank statements OR investment accounts. (All statements must show your name and account number.)


Gifted

• Gift Letter signed by an immediate family member

• A bank statement showing the funds in the donor's account

• A bank statement showing the gifted funds in your account


Borrowed

• Credit agreement/statement showing monthly payment

• Bank statement showing the funds in your account

This info is a great place to start when you’re looking to get a mortgage; but, every situation is unique, and we get that. When you apply for your MogoMortgage you’ll have a dedicated mortgage specialist working with you at every step along the way. They’ll get to know you and your unique situation to make sure they can get you the best mortgage product for your current situation and #LifeGoals.
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