The approval of a mortgage loan by a financial institution is based on four primary factors: the borrower's ability to repay, the quality of their credit and collateral, and their down payment. In this article, we will explore in detail the criteria required to obtain a mortgage approval, focusing on the current conditions and the elements that lenders consider when evaluating a loan application.
When purchasing a property, borrowers must demonstrate that they are also taking on a financial risk. Financial institutions approving the credit for the project must ensure the borrower's savings habits are of good quality and that the risk is adequately shared.
Here are the current down payment requirements for different types of properties:
- For 1-2 unit properties: 5% for the first $500,000 and 10% for the portion exceeding $1 million.
- For 3-4 unit properties: 10% down payment.
For uninsured cases:
- For 1-4 unit properties: 20% down payment.
- For 5+ unit properties: 35%, except for specific exemptions.
In all cases, it is necessary to prove that the down payment has been held for at least three months. It can come from various sources such as the borrower's gradual savings, withdrawal from an RRSP (Registered Retirement Savings Plan), borrowing secured by confirmed assets (e.g., using a home equity line of credit), future savings from the borrower's employment when it represents less than half of the down payment, proceeds from the sale of another property, a gift from a close family member, equity gift, or a non-repayable grant from a federal, provincial, or municipal organization.
It is crucial to demonstrate that the borrower has sufficient and stable income to meet the expenses associated with the property and their other financial obligations. Income can come from stable employment without a probationary period or from pension and investment income for non-working borrowers. If the borrower changes jobs during the process, it can complicate the mortgage loan approval. Unemployment income is not considered. Contractual employment income is generally considered when the stability of such income is evidenced by assessment notices from the past two years. In the case of a maternity or paternity leave, full income can be considered when the return-to-work date is known.
Income from self-employment and business ownership can be considered, and the historical income for the past two years is taken into account if it has been increasing; otherwise, only the income from the last year is considered. Once the income is established, the financial institution calculates two debt ratios: the Gross Debt Service Ratio (GDSR) and the Total Debt Service Ratio (TDSR).
- The GDSR is the basic debt ratio, which includes mortgage payments (principal and interest), property taxes, and heating costs, divided by the borrower's income.
- The TDSR is the total debt ratio, which includes the basic debt plus other personal debts, divided by the borrower's income. For uninsured cases, a 30-year amortization lowers the mortgage payment and improves the debt ratios.
If the borrower is close to the acceptable limits, they are obligated to choose a closed mortgage with a five-year term, as the debt ratio calculations are based on the five-year posted rate for all other mortgage products.
Lenders examine the borrower's credit history to assess their repayment habits and responsible credit utilization. A credit score below 680 can limit borrowing options, while a score below 640 may require additional guarantees or result in higher interest rates.
It is necessary to prove that the collateral property has good value and is in good condition. The property must be habitable and accessible throughout the year. Financing options for properties accessible only during three seasons (e.g., cottages) may have specific conditions requiring repairs before final approval.
The approval of a mortgage loan by a financial institution is based on four primary factors: the borrower's ability to repay, the quality of their credit and collateral, and their down payment. In this article, we will explore in detail the criteria required to obtain a mortgage approval, focusing on the current conditions and the elements that lenders consider when evaluating a loan application.