Finances and Pre-Approval

When you're getting ready to buy, making sure your finances are in good shape is the most important step.

Check your credit score
Check your credit score

Your credit score is one of the key factors that lenders will consider in offering you a mortgage loan. Different lenders and mortgage types will have different minimum scores required, but the higher your score, the better your rates. A score of over 800 is considered excellent and any score over 720+ is very good. To get a mortgage you'll need at least one borrower with a score higher than 680 as a general rule, though some lenders do work with people who have scores of 600-679.

Fortunately, checking your credit score is easy. Your bank may offer free credit reports, or you can use a service like Credit Karma or Borrowell to see your score and your credit report.

Not quite as high as you'd like? Here are a few tips to raise your credit score.

  • Make all your payments on time. Payment history makes up 35% of your score, and even one missed payment can drop your score significantly. If you have any unpaid collections on your report, you definitely need to settle those before you can be approved for a mortgage.
  • Keep your credit utilization low. This is the second most important factor in your credit score. Your total debt divided by your total credit limit across all accounts should definitely be below 30%, but lower is better. You can do this by paying down debt, avoiding adding to your balance, not closing credit accounts, and maybe accepting credit limit increase offers for your accounts, but...
  • Avoid new credit inquiries. Now is not the time to apply for new credit cards or auto loans, as each 'hard inquiry' made by another lender can ding your score a bit. However, checking your credit on a free service like Credit Karma is a 'soft inquiry' which doesn't affect your credit.
  • Have a diverse mix of credit types. If you're close to buying, this won't be a good tip for you (see above!) but having a mix of revolving credit like credit cards, installment loans like car loans, and open status accounts like phone bills looks good to lenders.
  • Keep your oldest accounts open. The older your total credit history is, the better. If your credit history is too recent or you have no credit history at all, you may be required to have a cosigner or wait until your credit is more established before you're approved for a mortgage. You may also be able to access special programs for new immigrants, if that's your situation.
  • Check your credit report for anything that's not accurate. If there are any accounts that aren't yours or other issues, you'll need to dispute that with the credit bureaus.

It may take a few months to raise your score. If your score is low and you can make big changes to 1 and 2, you may be able to improve it significantly pretty quickly.

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Understanding your affordability
Understanding your affordability

Your credit score isn't the only factor lenders consider when looking at your financial health. Lenders will want to see a whole list of financial documentation, including:

  • Income statements, like tax forms and tax returns. If you're self-employed, you may need to provide two years of tax returns to show the sustainability of your business.
  • Assets, like bank account and retirement account balances
  • Debts, including credit cards, student loans, and car loans
  • Current major expenses, like rent, and ongoing obligations like child support
  • Down payment savings and any gifted down payment amounts. If your down payment is less than 20%, you'll need to pay mortgage insurance as part of your mortgage payments. Different lenders have different minimum down payment requirements, but generally require 5%+.

Affordability is based on your income vs your costs with a given mortgage amount. There are two measures used to look at your income vs debt/costs - Gross Debt Servicing (GDS) and Total Debt Servicing (TDS). GDS compares your total monthly housing costs (mortgage, utilities, property taxes) against your gross monthly income. TDS includes all other debt and obligation payments along with your housing costs. GDS should be under 32% and TDS under 42%, but the lower the better.

The fastest way to get a sense of your affordability is to use an online mortgage calculator or affordability calculator. Don't forget about closing costs, which are usually 2-5% of the home price. Your real estate agent will be able to tell you about all the various closing costs and which ones apply to your particular situation.

Note that Canada requires a mortgage stress test for all buyers borrowing through federally regulated lenders (like banks) which means that your affordability will be calculated by lenders based on a higher interest rate than you're actually getting. This amount is your contracted mortgage interest rate plus 2% or 5.25%, whichever is higher. There are some alternative lenders like credit unions that don't use the stress test, but their rates may be higher.

It's important to calculate your affordability using the higher number, both so you can get a better sense of what you'll be approved for by lenders and to make sure you can comfortably pay the higher amount if interest rates increase.

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Getting pre-approved
Getting pre-approved

A pre-qualification is an estimate that a lender will make based on basic financial information like your credit score, income, and debt load. It gives you a general idea of how much you qualify for and the rate you can expect.

A pre-approval is a more accurate version of the pre-qualification, based on extensive financial documentation. You will be given a written commitment with a locked-in interest rate for up to 120 days.

Having a pre-approval letter in hand will show sellers that you're a serious buyer, which can help in bidding wars. Real estate agents will likely also prefer that you be at least pre-qualified, so they don't waste time showing you homes outside of your affordability.

You don't need to make a final choice on the lender you'll work with at this stage. You can get pre-qualified through multiple lenders to see where you can get the best rate, and make your final choice once you're closer to buying. Different lenders can offer different options and rates, so research is important. Your real estate agent will be able to recommend lenders you might like to talk to based on your specific needs.

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Closing Costs: Everything Besides the Home Price
Closing Costs: Everything Besides the Home Price

Saving up for a down payment can be such a long process that it's easy to forget that there are many other expenses involved in buying a home. Learn about the different fees and costs and be sure not to spend every penny on your down payment or start costly renovations until they're all accounted for.

The general rule is to put aside 3-5% of the home's price for closing costs beyond your deposit/down payment. Many of these fees will be handled through your real estate lawyer, and your real estate agent can also explain each fee and what and how you'll need to pay it. As a buyer, your real estate agent's fees are paid by the seller, but if you're both buying and selling at once you'll need to pay commission as a seller.


A deposit is around 1-5% of the purchase price, and is basically an advance on your down payment submitted with your offer to encourage the sellers to take it seriously. You'll need this very quickly, so be sure that it's liquid funds that are easy to access. It needs to be a certified cheque or bank draft, and you'll need another bank draft or wire transfer at closing for this.

Down Payment

Your down payment generally needs to be at least 5% of the purchase price, but having 20% is a good idea if you can manage it, to avoid needing to pay for CMHC Mortgage Insurance on top of the home price. These insurance premiums need to be paid in full at the start of your mortgage, if you need this insurance.

Home Inspection & Survey

A home inspection is always a good idea, and will run you around $300-1000. You may be required to do a land survey as well by your lender if you're buying a single family home, which will cost up to $1000, although an existing survey may also be accepted.


Your lender will likely require an appraisal to make sure your home is worth what you paid, and make the final decision on the mortgage amount you're approved for. Your part of the appraisal price could be a couple hundred dollars. Keep in mind that if your home is appraised for less than you paid, as can happen in hot markets with bidding wars, you may be approved for less mortgage and may need to pay more in cash.

Legal Fees & Disbursements

You'll need to pay a real estate lawyer to draw up your mortgage and for conveyance of title, typically $800-1000. Your lawyer will handle the transfer of payment for many of the other fees in this list.

Land transfer tax

This is one of the largest fees in closing costs at around 1-1.5% of the purchase price, and needs to be paid as a lump sum when you buy your home (i.e., it can't be rolled into your mortgage). If you're a first time home buyer, you are probably eligible for at least a partial rebate. In addition, Toronto has its own Municipal Land Transfer Tax with its own rebate rules.


Depending on when you close and if the seller has prepaid some of their property taxes, utilities, etc, you may need to pay a portion of these costs through your lawyer. It can be expensive upfront if the seller prepaid for the whole year.

The interest adjustment is a cost you may need to pay depending on the time between your closing date and the date of your first mortgage payment. You can avoid this by scheduling your first mortgage payment exactly one payment period after your closing date.

Title Insurance

Your lender will likely require title insurance in case of a property ownership dispute. Your lawyer will handle this with you and it costs a couple hundred dollars on average.

Fees for Certain Types of Homes or Buyers

If your home is a new build, you'll need to pay HST/GST on it, but you may be eligible for a rebate if you do need to pay it.

If you're not a citizen or permanent resident of Ontario, you may have to pay a 15% Non-Resident Speculation Tax.

If you're buying a rural property, there may be additional inspections like well and septic that your lender will require.

If you're buying a condo, you'll need an Estoppel certificate, which outlines all the fees, services, penalties, and rules associated with your condo board.

Moving Into Your New Home

Don't ignore the costs of moving itself, and any new appliances or furniture you'll need when you move into your new home. This always costs more than people expect!

Also, don't forget about property taxes, home insurance, likely increased utilities costs, Condo/Homeowners Association fees if applicable, and ongoing repair and upkeep costs (generally recommended to save 1% of the home price per year for those). It's better to oversave for closing costs and new-house costs, and end up with a little extra to spend on furnishings, versus the alternative.

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Lesser-Known Factors That Can Affect Mortgage Approval
Lesser-Known Factors That Can Affect Mortgage Approval

It's well known that your credit score, your down payment amount, your income and debt-to-income ratio are key factors in determining the amount of mortgage you'll be approved for - or if you're approved at all. But there are many other factors that can affect your approval in some situations.

Changing Jobs

It's generally a bad idea to change jobs right before applying for a mortgage, or while you're in the process before you've closed. Even if the job is better paying and higher level, lenders may still view it negatively if you're still in the first few months at the job, since you can be in a probation period. If you must switch jobs, be sure to be upfront with your lender, since if they find out later they can pull your approval. You may need to go through the qualification process again and could be approved for a different amount.

Definitely don't quit your job without another lined up immediately. That will instantly reduce your buying power and likely result in your mortgage approval being pulled. The more stable your recent job history looks, the better.


On a related note, if you're self-employed, it may be more difficult to get approved for the maximum mortgage at the best rates. It's worth talking to a lender or mortgage broker that has specific experience with the self-employed to make sure you get the best deal. You may want to make a larger down payment, and may need to work with a lender other than the biggest banks.

Your chances are best if your income is relatively stable and high, and you can prove it with two years of tax returns. Contracts and other proof that your business is booked for the immediate future is also useful. Again, the more stable your income history looks, the better.

Other Variable or Lower Income Situations

Similar to the self-employed, if you're living off your retirement accounts, have been on leave, are laid off seasonally in your industry, or otherwise have variable or lower income for any reason, you may need to provide more documentation and should work with someone experienced in your situation to get the best deal.

Your Spending History

Your lender will need to see at least two months of statements for all your accounts. Positive signs include having a healthy balance in your checking and savings, and paying off your credit cards in full each month. Negative signs include spending more than you earn, carrying a high load of debt and/or obligations (e.g. child support), maxing out your credit cards, and overdue payments. Be ready to explain any large deposits or withdrawals, and try to avoid making them while you're in the approval process before you close.

Other Loans

Try to avoid applying for a new credit card, auto loan, line of credit, or any other loan while you're in the mortgage approval process. Taking on new debt will make your debt-to-income ratio less optimal, and even applying for credit you don't use will ding your credit score for a little while. Both of those affect your mortgage approval.

If you already own multiple properties, this can also affect your ability to get approved for another mortgage.

Residency/Citizenship Status

If you're looking to buy a home as a non-citizen or non-resident, be sure to talk to a real estate agent and a lender experienced in this situation.

Pending Spousal Separation or Other Legal Complications

If you are in the middle of a separation or divorce, your lender may require additional documentation. Your lender should also know about things that affect your finances like if you're in the process of receiving an inheritance or dividing up an estate.

The Home You Want to Buy

There are many factors related to the home that can make getting a mortgage to buy it more difficult, or block it altogether. These include special factors like agricultural or business activities on the property, very rural or leisure/recreational properties, unique properties like tiny homes, and any property or title issues (pending lawsuits, uninhabitable condition, etc). If you're interested in unique or distressed properties, be sure to discuss this with your lender.

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Types of Mortgages
Types of Mortgages

Mortgages can seem confusing, with many different types and factors to consider. Learn more about the different kinds of mortgages below to help you make the right decision for you.

High Ratio vs Conventional Mortgages

The difference between these is your down payment. If you put less than 20% down, you have a high-ratio mortgage and will be required to pay for CMHC Mortgage Insurance on top of the home price. If you put down at least 20%, you have a conventional mortgage and are not required to have mortgage insurance.

Fixed-Rate Mortgages

In fixed-rate mortgages, you pay for stability. Fixed-rate mortgages have a set rate that stays the same for your term (typically 5 years). No need to worry about increasing rates during that time. But the fixed-rate is generally higher than the variable-rate, and fixed-rate mortgages generally have high prepayment and break penalties. If you think interest rates will go up, you have a low risk tolerance, and you intend to stay in your home longer than your mortgage term, a fixed-rate mortgage could be a good choice.

Variable-Rate Mortgages

In variable-rate mortgages, you take a gamble that the variable rate will be overall better than the fixed rate over the term of your mortgage. Generally, this has been true, but there's always the risk of rising rates. Usually you can switch to a fixed-rate mortgage at any time, and penalties for breaking your contract are likely much lower than breaking a fixed-rate contract. If you think interest rates will go down, you have a higher risk tolerance, variable-rates are currently well below fixed, or you may need to break your mortgage contract within the term, a variable-rate mortgage could be a good choice.

Open vs Closed Mortgages

With an open mortgage, you have maximum flexibility in exchange for a more variable or higher interest rate. You can make lump sums or pay off your mortgage any time you want, without penalty.

Closed mortgages generally have lower interest rates, but have stricter rules and impose a penalty for paying off the mortgage early. Lump sum payments and payment increases may be limited to a low percentage or not allowed in certain times (e.g. annually only).

Convertible and hybrid mortgages are a blend of the two. With a convertible mortgage you can switch from open to closed, or from variable to fixed-rate. Hybrid mortgages are unique to a particular lender, combining various mortgage products to fit the borrower's overall financial plan.

Special Mortgages

Tenants-in-common mortgages are a type of mortgage where two or more people or corporations buy a property together, outlining exactly how much each party owns and what each is responsible for paying. Joint tenancy mortgages are similar but have an even split.

Cash back mortgages come with higher interest rates and require a fixed-rate agreement, but provide a lump sum that is often used for immediate needs like repairs.

Collateral mortgages are kind of like Home Equity Lines of Credit, but planned when your mortgage is first approved. Doing this upfront means you don't have to re-apply and re-qualify later on, but since they can exceed your home's value and have higher interest rates, they can have risks and affect your ability to qualify for other credit products.

Purchase Plus Improvements mortgages can be useful for financially-stressed buyers buying a fixer-upper. In these mortgages, the cost of your planned major renovations can be rolled into your mortgage. You would need quotes for the renovations needed, to be approved for the total of the purchase price plus renovations, pay upfront for the renovations, and then the funds would be released for you.

Choosing the Right Mortgage

The right mortgage for you depends on a lot of factors. Working with a qualified lender or mortgage broker is key to navigating the mortgage process, particularly if your situation is not typical or straightforward.

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