Down Payment

The down payment can play a large factor in your maximum qualified mortgage approval. If you have 20% down payment saved, then you will not need CMHC (Canada Mortgage and Housing Corporation) default insurance. This insurance is mandatory if you have less than 20% down payment.

Paying for this additional but mandatory mortgage insurance will increase your monthly mortgage payment and it will affect your maximum approval.

However, if you have 20% down payment, you do not need the CMHC default insurance. The lender now actually has a higher risk, and your interest rate is usually higher than for borrowers who have less than 20% down payment. The CMHC default insurance is added security for the lender. If you (the borrower) become unable to pay for the mortgage, then CMHC will pay it back to the lender. So, the lender takes less risk if they lend to someone who has less than 20% down payment.

Obviously, if you have 20% or more saved, then use it. It will be cheaper for you in the long run.

Your Income

This goes without saying that your ability to pay back the mortgage is the largest factor that affects the amount of mortgage you qualify for. Someone that makes $50,000 per year may get approved for a smaller mortgage than someone who makes $250,000 per year. Most banks start out by giving the max payment of 44% of your gross income (this is the amount you are paid before taxes and benefits are taken off).

This means that your mortgage payment cannot exceed 44% of your monthly income. So, if you make $100,000/year, the bank will figure out that you make $8333/month. So, your monthly mortgage payment cannot exceed $3,666.

Stress Test

This is a hot topic, but the Canadian financial system has this in place to help protect home buyers against a time in the market where interest rates increase. The stress test rules are to qualify you at 5.25% or the interest rate offered by your lender plus 2%...whichever is higher.

Here is an example. Let's say your lender offers you a rate of 4.99%. The stress test you need to qualify for is 4.99% + 2% = 6.99%.

If your lender is offering you a rate of 2.99% then you need to qualify at 5.25%.

You need to qualify at whichever rate is higher, even though your actual rate is lower.

Length of employment

The length of employment is another factor that is considered. A 3-year history with the same employer looks more stable than having 5 employers in the last 3 years. Not to say that it isn't possible to get approved, but it's easier when it's more stable.

You may also need additional documents. If you've recently started a new job and you are paid per hour, the lender will need 2 most recent paystubs, a letter of employment that shows your hourly wage and your guaranteed work hours. This is what they use to estimate your projected annual earning.

Type of Employment

Paid Hourly

• T4 for the last 2 years
• 2 most recent paystubs
• Letter of employment (only needed if you've been there for less than 2 years.

The lender will use the average of the last 2 years as the income on the mortgage application.

Salary

• T4 for the last year
• 2 most recent paystubs

Lender will use your salary as your income on the mortgage application.

Commission

• T4 for the last 2 years
• Notice of Assessment for the past 2 years
• 2 most recent paystubs

The lender will use the average of the last 2 years as the income on the mortgage application.

Salary + Commission

• T4 for the last 2 years
• Notice of Assessment for the past 2 years
• 2 most recent paystubs

The lender will use the average of the last 2 years as the income on the mortgage application.

Self Employed

Sole Proprietor

• Notice of Assessments for the last 2 years
• T1 Generals for the last 2 years
• Tax returns prepared by a CPA

The lender will use the average of the last 2 years as the income on the mortgage application.

Corporation

• Notice of Assessments for the last 2 years
• T1 Generals for the last 2 years
• Tax returns prepared by a CPA

The lender will use the average of the last 2 years as the income on the mortgage application.

Rental Income

• Lease agreement
• Proof of rent for past 3 to 6 months
• T1 Generals for the last 2 years
• Notice of Assessments of the past 2 years

Some lenders will only account for 50% to 70% of rental income but 100% of the rental costs. This is to account for possible months when may go a few months without tenants, but you still have to pay for the mortgage and other expenses. In some cases, if you can show rental income for the past 2 years, they will account for 100% rental income.

*Note that some lenders will not count rental income if you are renting to family members. This is because the lender assumes you will be lenient with collecting rent from family members.

Existing debts

The lenders have to account for your debt payments in addition to your mortgage payments. However, the type of debt you have has certain rules the lender may use to qualify you form

Revolving debts

Examples are credit cards, lines of credit. Lenders will use 3% of the balance as the monthly debt payments on the mortgage application. If you have $30,000 balance between credit cards and lines of credit, the lender will use $30,000 x 3% = $900/month as a debt payment.

Loans

When it comes to loans, the lender will simply use the loan payment on the mortgage application. The balance of your loan doesn't matter. This is important for people to know, because they may try to pay down the loan before they pay down the line of credit. But it's better for the application if you pay down the line of credit before you pay down the loan.

‍Your credit score

Your credit score is a big factor that might influence the decision of the lender. Your credit score will impact the terms of your loan. It can also impact the interest rate being charged, which in turn affects your monthly mortgage payment, which affects your maximum approval.

Additional funds for closing costs

In addition to your down payment, you also need funds to cover closing costs. These costs can be used to pay your lawyer fee, inspection, appraisal, land transfer tax, realtor fee...etc. Banks usually account 5% of the purchase price for closing costs. Remember that the lawyer, realtor, appraiser and any other taxes and fees need to be paid. So, this is part of the mortgage application.

If you have an accepted offer to purchase a home for $500,000 and have (20%) $100,000 saved for down payment, but no additional funds allocated for closing costs the lender will take the 5% from the $100,000. 5% is $25,000 to be used for closing costs. This means your $500,000 purchase is actually $75,000 down payment. Now because you have less than 20% down payment, you may need to consider CMHC default insurance. This will increase your mortgage expense and may actually lower the maximum pre-approval.

Last comments

Having an experienced and knowledgeable mortgage broker or mortgage agent is key to having this process go smoothly for you.

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