How to Get a Mortgage: Comprehensive Guide for 2023
Table of Contents
- What's new in the mortgage world in 2023?
- Different Types of Mortgages: Everything You Need to Know
- Most Important Steps When Getting Your Mortgages
- How to Improve Your Chances
What's new in the mortgage world in 2023?
With interests rising for much of 2022, we have seen the real estate and mortgage market in Ontario change. Many lenders tightened up their lending parameters at the time. Some lenders were offering lower loan to values (LTV's), reducing their lending areas, and scrutinizing the borrower's financial and income situations more carefully. Since the start of 2023, and more specifically the first rate freeze in almost a year in March 2023, we have started to see more and more lenders coming back up to 80% LTV's, expanding their lending territories, and getting more competitive on their fixed mortgage rates. We are also seeing more and more homebuyers and homeowners seeking out mortgages from alternative lenders that do not qualify using the stress test rate and instead are qualifying borrowers based on their actual contract rate.
For those who do not qualify for a mortgage through an institutional mortgage lender, then a short term private mortgage might be a good temporary option until they are able to qualify for a mortgage with a prime or alternative institutional lender. Although having higher interest rates and extra fees, in the short term a private mortgage can help pay down debts to improve cash flow and give you a chance to improve your credit score in order to help you qualify with an institutional lender in as little as 6 months. Since the end of 2022 and the start of 2023, we have seen some great new private mortgage products come into the market. We have seen more private lenders offering 1st and 2nd position private HELOC's (private home equity line of credit), which are mostly completely open, and allow the borrower to borrow and pay down as much as they would like at any time.
With the recent issues plaguing banks, we have seen the bond yields drop thus far in 2023, which in turn should result in further decreases to fixed rate mortgages. Given that inflation has started to decrease in 2023, it is also speculated by many economists and industry leaders that the Bank of Canada (BOC) will continue to either hold the overnight lending rate steady or might even begin decreasing it.
All of this combined with an expected increase in real estate activity, caused by an increase in homes becoming available for sale and buyers re-entering the market, could make it an ideal time for homebuyers and investors to revive their search for a new property.
If you are an aspiring homeowner or property investor, the world of mortgage approval may feel daunting at first. You may be wondering how to get a mortgage loan or how long it might take to get a mortgage loan. This guide covers the essentials of mortgage approval to equip you with the knowledge you need to succeed in the 2023 market.
Different Types of Mortgages: Everything You Need to Know
Open Mortgages vs. Closed Mortgages
The two main types of mortgage agreements in Canada are open and closed agreements. Under an open mortgage contract, the borrower can pay off as much of their debt as they want, when they want. There are no prepayment penalties associated with an open mortgage. However, borrowers often have to pay inflated interest rates in exchange for this perk. You may want to consider an open mortgage if you have a lot of excess capital or are planning to sell your home shortly.
There are two good alternatives to an open mortgage. Both variable-rate mortgages and home equity line of credit (HELOC) offer competitive interest rates, and HELOCs are typically repayable at any time without penalty. Variable-rate mortgages typically come with only a 3-month interest penalty if repaid in full prior to the renewal date.
Under a closed mortgage, your payment schedule will follow a set term and timeline. Sometimes, the borrower will be allowed to make a few prepayments without penalty. However, the mortgage duration will not change. A closed mortgage will be accompanied by stricter conditions but will usually charge a lower interest rate.
You may want to consider a closed mortgage if you plan to keep your home for the full term of the mortgage. Some closed mortgages allow for full or partial principal repayment upon final sale of the house, and some are portable to new home purchases.
Other Types of Mortgages
Beyond simply deciding whether you want your agreement to be open or closed, there are a few other factors to consider when deciding on what mortgage type is best for you and your needs:
- Portable Mortgage: if you already own a home and are looking to move to a new one, you may have the option to port your mortgage. Porting your mortgage allows you to transfer part or all of your current mortgage to a new property while keeping the same interest rate and contract terms. The porting process might allow you to avoid paying prepayment penalties for breaking your mortgage contract before your term is up. You may want to consider a portable mortgage if your mortgage lender allows it and you are satisfied with its mortgage contract terms.
- Assumable Mortgage: if you are looking to take over someone’s property before they have finished paying it off, you may qualify for an assumable mortgage. Under an assumable mortgage, the buyer takes over the seller’s current mortgage and covers the remaining payments. This type of mortgage is only possible if the seller had a fixed interest rate mortgage and was not using a home equity line of credit (HELOC). This is a great option for buyers looking to take advantage of historical interest rates, which are much lower than the rates at the time of the new purchase.
- Reverse Mortgage: A reverse mortgage allows individuals to give up equity in their mostly paid-off home back to the lender in exchange for monthly payments. This type of mortgage is most popular amongst retired homeowners who wish to supplement their monthly pension payments. Once you sell your home, all profits from relinquished equity are awarded back to the lender.
Most Important Steps When Getting Your Mortgage
How to Get Pre-Approved for a Mortgage
Before beginning the house-hunting process, getting pre-approved for a mortgage is a good idea. A pre-approval serves as a commitment that a lender will lend you a specific amount and outlines the monthly payments and associated interest rates. Access to these figures makes it easier to search for properties within your price range and helps narrow down your lenders before you commit to a mortgage.
Although getting a pre-approval is strictly optional, doing so comes with many advantages. When you receive an official pre-approval, the interest rates remain valid for 90 to 120 days. If interest rates rise in the meantime, you can save thousands in the long run. Additionally, getting pre-approved shows sellers that you are serious and willing to go the extra mile— which may help you win a bidding war or two.
If you decide to get pre-approved, our expert team of Clover Mortgage brokers will work one-on-one with you to look over your financial portfolio and vet it against a vast network of over 50 lenders to find the perfect mortgage rate for you. Contact Clover Mortgage today to schedule a free consultation with one of our professional brokers.
Finding a Property
Once you have your pre-approval in hand, finding a property is far easier. While shopping around in your price range, it is important to consider factors such as location, size, and neighborhood dynamics before selecting a home. Once you have found the perfect property for you, it is time to place an offer. In order to buy homes in the GTA, you may have to engage in a bidding war or two.
Finalizing the Details
In order to approve you for a mortgage, your lender will conduct a financial background check to gauge your eligibility. If you have a pre-approval, you may skip this step, but that will be up to each lender’s discretion. Here are some of the items that will be considered:
- Proof of income. Your lender may look at your employment history, income tax statements, recent pay stubs, or job letters. If you are self-employed, you may need to provide additional documentation, including your business license, tax statements, incorporation documents, and T1 generals. Your lender is trying to ensure that you have the means to make your monthly payments by looking for stable cash flows.
- Credit score. Your credit score significantly influences your ability to obtain a mortgage. A high credit score demonstrates to lenders that you pay your bills on time and don’t have a history of excessive borrowing. A low credit score makes you a riskier borrower in the eyes of lenders. In Canada, credit scores range from 300 to 900. In order to get approved for a mortgage, you want your credit score to be at least 620. However, some private lenders may waive score requirements. Borrowers holding lower scores can be charged more significant interest fees to justify the increased risk.
- Debt-to-Income Ratio (DTI). Your Debt-to-Income Ratio is calculated by dividing the total sum of your minimum monthly debt payments and your gross monthly income. It is a metric used by your lender to determine the strength of your cash flows and predict your ability to make your monthly payments successfully.
Closing the Deal
Once your lender gives you the green light, it is time to close the deal. You will need to attend a closing meeting where you will be allowed to ask any last-minute questions about the agreement. You will also need to bring a valid form of ID and a Closing Disclosure. Once you review the contract and sign, the home is officially yours.
How to Improve Your Chances
Check Your Credit Report
When applying for a mortgage, your credit score will greatly impact the loan amount and interest rates you qualify for. Canadian credit scores range from 300 to 900, but you should aim for at least a score of 620 to improve your chances of getting approved.
Before contacting your broker, requesting your credit report from the Canadian credit bureau can be a good first step. Sometimes, there may be errors in your report. For instance, you may have repaid a loan, but it is reflected as unpaid debt in your file. By checking your report ahead of time, you have time to amend these errors before beginning the mortgage approval process.
If there are no errors in your credit report, but your score is lower than you would like it to be, you now have the opportunity to raise your credit score before applying for a pre-approval. The easiest way to improve your score is by using around 10% of your limit on a credit card and then immediately paying it off. By repeating these steps and ensuring repayments are always timely, your credit score should slowly improve.
Save up for Your Down Payment
When you purchase a home, you will need to put down a sum of cash upfront. This is called a down payment. In Canada, the legal minimum down payment will differ based on the price of your home.
If the home you purchase is worth less than $500,000, you must put down 5% of the price. If the home you purchase is worth more than $500,000 but less than $1 million, you must put down 5% of the first $500,000 and 10% of the amount that surpasses $500,000. If the value of your home is over $1 million, you must put down at least %20 of the asking price.
Although homes under $1 million allow you to put down a smaller percentage of the asking price, any down payment under 20% of the home’s value must be accompanied by the purchase of mortgage loan insurance. This insurance protects the lender if you default but can cost you thousands in the long run.
The best way to save money on your payments is to put down as much down payment as you can afford. A few extra months to save up a more significant down payment will increase your odds of approval and lower your long-term costs.
Keep Your Income Stable
When approving you for a loan, your lender wants to know that you can make the required monthly payments. Having a stable job dramatically increases your odds of approval because it proves that you will have access to a steady cash flow. If you have been with your employer for a long time, this will likely increase your odds even further as it proves your commitment to the job and because senior employees are less likely to be let go.
If you are self-employed, you might have a harder time proving the stability of your income through traditional channels. The best advice in this case is to gather all your company documents, including documents of incorporation, income statements, etc. and working directly with a Clover Mortgage broker to find the best lender for you.
Pay Down Existing Debt
Lenders will examine your debt-to-income ratio when approving you for a mortgage. The more outstanding debts you have, the less income you have available for your monthly mortgage payments. Paying off your existing debts before applying for a mortgage will significantly increase your odds of success. Additionally, debt repayment will have the added benefit of improving your credit score.
Set Realistic Expectations
When looking at your finances and deciding on a home, you must consider the realistic budget you have to work with. Consider if you are planning to make other large purchases in the future, and account for those plans. It may not be realistic, for instance, to spend 50% of your monthly salary on housing repayments.
Housing in Canada is expensive. While the market has started to cool, the average price of a home still trends upwards of $700,000. This can sometimes make it difficult to get approved for mortgages without a significant household income. While this trend will hopefully change in the coming months with new government policies such as lower minimum down payments being proposed, you may want to consider opting for a smaller property to qualify for better rates.
If you are not approved for a mortgage with low rates, consider if you can afford the higher rates that come with a risky mortgage. In some cases, it may be better to spend a year or two fixing your credit score and repaying debt before re-applying.
Consult the Professionals
Getting the right mortgage can be a tricky process. Luckily, Clover Mortgage is here to help. Unlike most brokerages, we have worked and closed deals with over 50 different lenders. We know our network of lenders like the back of our hand, giving us the expertise to connect you with the perfect loan.
Each buyer is unique, and each mortgage lender will differ in their offerings and products. Our Clover Mortgage team of underwriters is highly skilled and has access to over a hundred different mortgage products through our network of lenders. We will work with your best interest in mind and find a loan that meets your unique requirements.
If you are ready to begin looking for a mortgage, contact us today for a free consultation!
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