Blog Post

Understanding Mortgage Qualification

Martin Jensen • Mar 15, 2017

For the first time home buyer, it's no secret that the mortgage process might seem a little daunting! Buying your first home is a huge decision, and when things "come together", they do so quickly. In order to be as prepared as possible, it's good to have a foundational understanding of mortgage qualification. But don't worry, I will walk through this with you every step of the way. If you ever need anything, contact me anytime!

This is the introduction post to a short series that explores a lender’s decision making process that ultimately leads to your mortgage being approved or declined. Here are some of the topics we will cover in more depth in the coming weeks...

  • Understanding Income
  • Understanding Credit
  • Understanding Downpayment
  • Understanding Property

General Understanding

Although sometimes it may seem like it, let me assure you that it is not your fundamental right as a Canadian to borrow money. In fact, borrowing money for a mortgage in Canada is becoming increasingly difficult. Over the last 5 years, the government has tightened up lending guidelines 4 times and lenders seem to be looking at every mortgage application with a magnifying glass. Most recently OSFI, the government regulator came out and said that they expect a higher level of scrutiny on all mortgage applications.

Ultimately, its the lender who decides if they are comfortable with lending you money, and each lender has their own level of risk tolerance when assessing a mortgage application. Convincing the lender that you are a "good risk" is part of what a mortgage broker does for you!

There are four main areas common to every lender for their assessment. I will outline them for you now, and then follow up with an in depth look at each section over the coming weeks.

Understanding Income


Firstly, you’re looking to borrow money, are you able to pay it back? The lender wants to be assured that you have the ability to repay the money they lend you with interest. So they will ask for documents to support your income, and if they aren’t satisfied with what they get, they will ask for more.

Lenders look at the following:

Employment type – are you employed full time, part time, working seasonally, or collecting a pension?

Employment status – are you a permanent employee, have you passed your probationary period, are you on maternity leave or are you working term contracts?

Tenure – how long have you been employed in your current position, and how long have you been working in that industry?

Income type – are you self-employed, or do you have a guaranteed income, are you using bonus or overtime income, if so, how long have you been making that income?

And the list goes on and on. Obviously the more stable your job is, the longer you have been there, the more qualified you are to do your job, the better. How the lender assesses your income is probably the biggest factor in determining if they will lend you money.

Understanding Credit

Once the lender believes you have the ability to repay the loan, they will have a look at your track record of repaying previous loans. If you can’t make the minimum payments on your $1000 limit Mastercard on time what confidence are you giving the lender that you will make your mortgage payments on time?

In Canada there are 2 main credit reporting agencies, Equifax and Transunion. Typically Transunion is used by consumers to monitor their credit scores personally to protect against identity theft, while Equifax is used by lenders to determine credit worthiness.

Every time you have borrowed money from a financial institution, a history of that loan has been recorded on your permanent credit report. Your credit report is updated regularly as you either make or fail to make payments on your outstanding debts. All of the information including payment history, amount owed, length of credit history, types of credit and new credit is assessed and a credit score is generated.

Lenders look at both your credit score and the history on your credit report when deciding if you are a good risk to give a mortgage.

Understanding Downpayment

Okay, so the lender is satisfied with your income verification and you have a demonstrated history of solid loan repayment through your credit score… now, how much skin do you have in the game?

In order to lend you money for a mortgage, the lender is going to want to see that you have some money saved up for a downpayment. In Canada, the minimum downpayment you are required to come up with is 5%, meaning that the most a lender will offer you on a mortgage is 95% of the total purchase price.

Obviously the more money you apply as a downpayment, the stronger your mortgage application will be. At 20% downpayment, you are able to avoid paying mortgage insurance premiums and take out what is called a conventional mortgage.

In addition to your downpayment, you will also have to prove that you can afford to cover the legal costs in closing your mortgage, you know… paying your lawyer, paying for the registration at land titles, and lots of other small things. Typically this amounts to 1.5% of purchase price, but it can be higher depending on what province you live in.

Understanding Property

This is the wildcard of the bunch. Even if you are the best applicant in the world, you’ve been at your incredible job for 26 years, you have an impeccable credit history, and an enormous downpayment… if the property you are trying to purchase is garbage, you’re not getting a mortgage. Period.

The property is the collateral the lender holds in case you default on your mortgage. Lenders only lend on solid properties.

This means the lender will make every effort to ensure the property they are lending on is without defect. They only lend on properties they consider “prime and marketable”. The best way to look at it is, if you default on your mortgage, and the lender has to repossess the property, how easy would it be for them to sell it and get their money back? And abnormalities make properties less marketable.

So if you are looking on MLS and you find a 600 sq ft, mouldy non-remediated grow op, “handyman special” that has been sitting on the market for 2 years with a basement that is crumbling in on itself (without an engineer’s report), chances are you should just keep looking, no one is going to lend you money on this.

In Summary

As plainly as I can put it, the biggest problem you will face in applying for a mortgage is the potential disconnect between your belief that you are credit-income-asset-worthy to borrow money, in your own mind minimizing your flaws, compared to the lender’s scrutiny of your income-credit-asset worthiness, seemingly making a huge deal out of insignificant issues.

You might want to read that last sentence again.

If you go into the bank, the banker has the bank’s best interest in mind, they work for the bank, paid by the bank, to limit the risk to the bank while making money for the bank. In no way do they work or represent you. On the other hand, when you work with me, I work for you, with your best interest in mind. I present your application to a lender or several lenders in a way that highlights your strengths and explains any shortcomings. I use my knowledge, experience and relationships to advocate on your behalf making sure to put forward a clear and concise mortgage application ensuring the best chance for an approval. As an added bonus, my services are free to you.

Over the next couple of weeks and months I will be digging in a little deeper on each of these points and sharing more about how a lender looks at your mortgage application. Keep an eye out!

If you have any questions about this, or would like to sit down and discuss applying for a mortgage, please feel free to contact me anytime! I would love to talk with you.

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Understanding Payment Frequency

By Martin Jensen • 15 May, 2024
You’ve most likely heard that there are two certainties in life; death and taxes. Well, as it relates to your mortgage, the single certainty is that you will pay back what you borrow, plus interest. With that said, the frequency of how often you make payments to the lender is somewhat up to you! The following looks at the different types of payment frequencies and how they impact your mortgage. Here are the six payment frequency types Monthly payments – 12 payments per year Semi-Monthly payments – 24 payments per year Bi-weekly payments – 26 payments per year Weekly payments – 52 payments per year Accelerated bi-weekly payments – 26 payments per year Accelerated weekly payments – 52 payments per year Options one through four are straightforward and designed to match your payment frequency with your employer. So if you get paid monthly, it makes sense to arrange your mortgage payments to come out a few days after payday. If you get paid every second Friday, it might make sense to have your mortgage payments match your payday. However, options five and six have that word accelerated before the payment frequency. Accelerated bi-weekly and accelerated weekly payments accelerate how fast you pay down your mortgage. Choosing the accelerated option allows you to lower your overall cost of borrowing on autopilot. Here’s how it works. With the accelerated bi-weekly payment frequency, you make 26 payments in the year. Instead of dividing the total annual payment by 26 payments, you divide the total yearly payment by 24 payments as if you set the payments as semi-monthly. Then you make 26 payments on the bi-weekly frequency at the higher amount. So let’s use a $1000 payment as the example: Monthly payments formula: $1000/1 with 12 payments per year. A payment of $1000 is made once per month for a total of $12,000 paid per year. Semi-monthly formula: $1000/2 with 24 payments per year. A payment of $500 is paid twice per month for a total of $12,000 paid per year. Bi-weekly formula: $1000 x 12 / 26 with 26 payments per year. A payment of $461.54 is made every second week for a total of $12,000 paid per year. Accelerated bi-weekly formula: $1000/2 with 26 payments per year. A payment of $500 is made every second week for a total of $13,000 paid per year. You see, by making the accelerated bi-weekly payments, it’s like you end up making two extra payments each year. By making a higher payment amount, you reduce your mortgage principal, which saves interest on the entire life of your mortgage. The payments for accelerated weekly payments work the same way. It’s just that you’d be making 52 payments a year instead of 26. By choosing an accelerated option for your payment frequency, you lower the overall cost of borrowing by making small extra payments as part of your regular payment schedule. Now, exactly how much you’ll save over the life of your mortgage is hard to nail down. Calculations are hard to do because of the many variables; mortgages come with different amortization periods and terms with varying interest rates along the way. However, an accelerated bi-weekly payment schedule could reduce your amortization by up to three years if maintained throughout the life of your mortgage. If you’d like to look at some of the numbers as they relate to you and your mortgage, please don’t hesitate to connect anytime; it would be a pleasure to work with you.

Construction Assignments

By Martin Jensen • 08 May, 2024
One of the benefits of working with an independent mortgage professional is having lots of great financing options! Rather than dealing with a single lender with one set of products, independent mortgage professionals work with multiple lenders who offer a wide selection of mortgage financing options that provide more choice. Increased choice in mortgage products is beneficial when your situation isn’t “normal,” or you don’t quite fit the profile of a standard buyer. Purchasing a new construction home through an assignment contract would be a great example of this. Purchasing a new construction home through an assignment contract can be tricky as not every lender wants the added perceived risk of dealing with this type of transaction. Most of these lenders won’t come out and say it; instead, they add a significant list of qualifying conditions to make the process harder. The good news is, there are lenders available exclusively through the broker channel that have favourable policies for assignment purchases. Here are some of the highlights: All standard purchase qualifications apply, including applicable income verification, established credit, and required downpayment Assignments can be at the original purchase price or current market value Minimum 620 beacon score with no previous bankruptcies or consumer proposals The full downpayment must come from the purchaser and not include any incentives from the seller. As far as documentation goes, the lender will want to see the original purchase agreement signed by all parties, the MLS listing, the assignment agreement signed by the builder, the original purchaser, and the new buyer. The lender will also want to see the side agreement between the original purchaser and the new buyer, including the amended purchase price. The lender will want to substantiate the value through a full appraisal. Now, as every situation is different, this list of conditions is in no way exhaustive but meant to show that assigning a new construction purchase contract is doable while highlighting some of the terms necessary to secure financing. If you’re looking to purchase new construction through an assignment contract, or if you’d like to discuss purchasing a home through traditional means, please connect anytime! It would be a pleasure to outline the mortgage products on the market that won’t limit your financing options!

Understanding a Spousal Buyout Mortgage

By Martin Jensen • 01 May, 2024
If you’re going through or considering a divorce or separation, you might not be aware that there are mortgage products designed to allow you to refinance your property and buy out your ex-spouse. If you’re like most people, your property is your most significant asset and is where most of your equity is tied up. If this is the case, it’s possible to structure a new mortgage that allows you to purchase the property from your ex-spouse for up to 95% of the property’s value. Alternatively, if your ex-spouse wants to keep the property, they can buy you out using the same program. It’s called the spousal buyout program. Here are some of the common questions people have about the program. Is a finalized separation agreement required? Yes. To qualify, you’ll need to provide the lender with a copy of the signed separation agreement, which clearly outlines asset allocation. Can the net proceeds be used for home renovations or pay off loans? No. The net proceeds can only buy out the other owner’s share of equity and/or pay off joint debt as explicitly agreed upon in the finalized separation agreement. What is the maximum amount that you can access through the program? The maximum equity you can withdraw is the amount agreed upon in the separation agreement to buy out the other owner’s share of the property and/or retire joint debts (if any), not exceeding 95% loan to value. What is the maximum permitted loan to value? The maximum loan to value is the lesser of 95% or the remaining mortgage + the equity required to buy out other owner and/or pay off joint debt (which, in some cases, can total < 95% LTV. The property must be the primary owner-occupied residence. Do all parties have to be on title? Yes. All parties to the transaction have to be current registered owners on title. Your solicitor will be required to confirm this with a title search. Do the parties have to be a married or common-law couple? No. Not only will the spousal buyout program support married and common-law couples who are divorcing or separating, but it’s also designed for friends or siblings who need an exit from a mortgage. The lender can consider this on an exception basis with insurer approval. In this case, as there won’t be a separation agreement, a standard clause will need to be included in the purchase contract to outline the buyout. Is a full appraisal required? Yes. When considering this type of mortgage, a physical appraisal of the property is required as part of the necessary documents to finalize the transaction. While this is a good start to answering some of the questions you might have about getting a mortgage to help you through a marital breakdown, it’s certainly not comprehensive. When you work with an independent mortgage professional, not only do you get a choice between lenders and considerably more mortgage options, but you get the unbiased mortgage advice to ensure you understand all your options and get the right mortgage for you. Please connect anytime; it would be a pleasure to discuss your needs directly and provide you with options to help you secure the best mortgage financing available. Also, please be assured that all communication will be held in the strictest of confidence.
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