The Mortgage approval process can seem mysterious, and for some like an intimidating experience. It’s true that there are several personal items for a lender to decide on, and the whole business of mortgage lending can be pretty sophisticated. But if we break up how a lender approves people into their key components, it’s really not so bad. Here, we take a high level view to help take the mystery out of mortgage approval requirements.
There are 4 Key Pillars to Mortgage Approvals
- Credit– A lender will look at your credit score to determine based on past credit behaviour, if you are likely to make your mortgage payment on time. A credit score over 640 is often a ‘pass’ for lenders, and typically lenders like to see scores at 680+ for the lowest rates. The credit score can range from 300 – 900. If you made one or two mistakes in the past, you’re probably OK. If there are more substantial and ongoing issues with your score – its best to discuss this with your Broker and get some advice. You might be surprised how fast scores can rebound!
- Income– With income, it’s pretty straight forward. If having mortgage payments is going to put you in a stressful situation, then it’s probably not a good idea to proceed with. Long term mortgage affordability is a really important thing to consider for everyone involved with the mortgage. We look more specifically at mortgage affordability HERE.
- Down Payment– Down payments of 20% or more are known as conventional mortgages. With less than 20%, mortgages are called a high ratio or insured, and are required to have Mortgage Default Insurance added to them. A down payment can be gifted or borrowed, however if it is borrowed, the payback must be taken into account for overall affordability. The minimum down payment for an owner occupied property is typically 5%.
- Quality of Structure– Lenders want to ensure that if they have to sell the property in an absolute worst case scenario that it will be sold easily. Properties that need work or ‘handy man specials’ can sometimes pose approval issues, however depending on the property – these issues can usually be resolved.
Lenders like to see strength in each of these areas, and if this is the case, approval will be a breeze. If there is a weakness in one area – for example credit – but strength in another area – for example down payment/ equity – then this can often balance out for a mortgage approval.
Ultimately, with the right education and guidance, anyone who is looking for mortgage financing can get approved – there’s never any rocket science involved.