Qualifying for a Mortgage Loan

When it comes to qualifying for a mortgage, lenders in Canada look for what is known as the 5 C’s of credit: Credit history, Capital, Collateral, Capacity and Character. These factors measure your overall ability to repay your mortgage, and help get you approved. Let’s take a closer look.

1. Credit history and rating

Do you have a good history of paying back other loans, credit cards or bills? Lenders will examine how well, or not, you’ve maintained a clean credit history when evaluating you for mortgage approval.

Here are a few ideas on you can improve your rating, and better your chances of being approved for a mortgage:

• Pay off all of your credit cards
• Don’t apply for any new credit cards
• Avoid other loans – new cars, furniture, etc
• Take out an RRSP – this will appear on your credit report (and if you’re a first-time home buyer, you can use a portion of your RRSP for a down payment)

2. Capital

Have you accumulated any additional assets? Do you already own any other properties, cars or assets of value?

3. Collateral

Collateral is the physical asset you will be leveraging against the mortgage loan – i.e., your new home or property. As with any loan, if you default on a mortgage, you run the risk of losing your collateral.

4. Capacity

Capacity represents your ability to make mortgage payments – based on your income and outstanding debts. A good rule of thumb is that housing costs shouldn’t exceed 30-32{c2b9be1ce351ae251827de10ed96c346be28c200eaedb3a9f5966972c679ea40} of your gross income. (Debts shouldn’t take more than 80-42{c2b9be1ce351ae251827de10ed96c346be28c200eaedb3a9f5966972c679ea40} of your gross income.)

5. Character

How long have you had your current job? What sort of business are you in? How long have you lived in your current home? The answers to questions like these give lenders some insight into your personal character, and can help evaluate your suitability for a mortgage loan.

Here’s an important tip to help you qualify for a mortgage: try not to change jobs within 6 – 8 months of making a home purchase, unless it is a promotion, or a career advancing move. Lenders want to see income stability when considering mortgage loan applications.

Applying for a Pre-Approved Mortgage

Once you’re satisfied that you have satisfactorily covered off the 5 C’s, it’s time to apply for a pre-approved mortgage. How you are able to meet the above criteria directly impacts the amount of money you are eligible to borrow.