Unless you have all of the money you need to complete the purchase of the home you have an accepted offer on; you will have made the contract of purchase and sale conditional on you being able to secure a mortgage loan.
When you apply for a mortgage loan, the lender will look at several factors before deciding if they’ll approve the loan; they look at you and the property in detail.
Credit: They’ll do a credit check on you to see if you have a good history of paying your bills on time. Be careful not to default on cell phone bills while disputing charges; it’ll reflect poorly on your credit score. Before agreeing to offers for credit cards, remember that each application shows up on your credit bureau as a pull. (investigation of your credit) and will negatively affect your credit score.
Capability: This is your ability to handle the mortgage payment. Lenders will not generally lend any amount that raises your debt service costs per month beyond 42% of your total income. They will add up all of your monthly payments, including your minimum payments on credit cards, car loans, the monthly mortgage payment plus interest and annual city taxes. Most lenders do not want the total of all your monthly payments to exceed 42% of your net monthly income. They want you to have money left over to live on. You will be asked to show the notice of assessment statement from your tax return, most recent pay stub and a job letter stating that you are indeed, employed.
Cash: This is the money you are putting into the purchase; the down payment. The amount you need to borrow will depend on the percentage you put down on the amount owing towards the purchase price. The lender will want to see your bank statement showing that the cash has been in savings for a certain amount of time.
If a family member is giving you the money for the down payment; you’ll need to get a gift letter from them.
5 to 19% high ratio/ higher risk to the bank and will require default insurance.
20% & higher conventional/ lower risk to the bank and no default insurance required.
Basically the more money you put into the purchase, the lower the lender will have to advance, and that decreases the risk because you have skin in the game.
Lenders are all about risk; that is the risk of you not paying them back. So don’t leave your job just before applying, always pay your bills on time and try to get as close to 20% down payment as possible.
Types of Lenders
Lenders come from a variety of companies like Banks, Mortgage Brokerages, Mortgage Investment Corps (MIC), Arms length RRSP lenders etc…
Banks: You make an appointment and show up for a meeting with one of the banks representatives. They are governed by the rules and regulations of their directors.
Mortgage Brokerages: These brokers basically shop your mortgage with various lenders in search of the lender with the best rate and the best terms for us. They are often able to secure better rates from the same banks that you visit because of the volume of business that they bring to those banks.
Mortgage Investment Corporations: These lenders generally charge a higher interest rate than other lenders because they are often used for special projects or when conventional lenders won’t approve the mortgage.