Steps To Apply For A Mortgage For The First Time
Are you preparing to apply for a mortgage for the first time? This is an incredibly exciting time in your life and undoubtedly a big step! As exciting as it can be, it's also a step that can come with a lot of stress. And when you're not entirely sure how the mortgage process works, what to expect, or what you'll need to apply, it's particularly challenging and stressful. But we're here to help! In today's post, we're going to discuss the steps you'll need to follow to apply for a mortgage for the first time.
7 Steps to Apply for a Mortgage for the First Time
Of course, it's one thing to apply for a mortgage, but it's another thing to qualify for a mortgage.
These tips we're sharing today have both of those goals in mind to give you the best chance of a successful mortgage application.
(Here's another helpful resource about the mortgage process in Canada to read next)
Check your credit score
Your first step is checking your credit score. This gives you a baseline of your financial health, and it will let you know if there's anything that needs to be addressed before you apply for a mortgage. Canadian credit scores range from 300-900 with Poor, Fair, Good, Very Good, and Excellent classifications.
Before you apply for a mortgage, you'll want your credit score to be at least 660, but the higher, the better. At the same time, the higher your score, the lower your mortgage rate can be! After all, this is what lenders look at to determine how trustworthy you are and how likely you are to maintain your mortgage payments.
Save your down payment before you apply for a mortgage
Planning to buy a home in Canada? It's important to have your down payment saved up before you apply for a mortgage.
In Canada, the minimum down payments are as follows based on home prices:
- Under $500,000: The minimum down payment will be 5% of the purchase price.
- Between $500,000 to $999,999: Homeowners will need 5% of the first $500,000, and 10% for the portion of the purchase price above $500,000.
- $1 million+: This requires 20% of the total purchase price.
Whenever possible, paying more than the minimum down payment is ideal. If you pay less than 20% of the home purchase price on a home in Canada, you'll need to buy mortgage loan insurance. This will come with insurance premiums which ultimately increase your monthly mortgage payments.
Maintain a stable income
AKA: don’t quit your day job yet! It's also important to maintain a stable income for as long as possible before you apply for a mortgage. Any signs of financial insecurity or instability are big red flags to lenders.
Manage existing debt
While they don't necessarily need to be paid down to zero, your debts should be well-managed before you apply for a mortgage. When other forms of debt, including student loans, lines of credit, and credit cards, are paid down, it means you'll be able to borrow more for your mortgage at a better rate.
Now it's time to start learning about mortgage pre-approval in Canada!
As the Government of Canada explains:
"Mortgage lenders have a process which may allow you to:
- know the maximum amount of a mortgage you could qualify for
- estimate your mortgage payments
- lock in an interest rate for 60 to 130 days, depending on the lender
The mortgage preapproval process may be divided into various steps. It may also be called mortgage prequalification or mortgage preauthorization. Different lenders have different definitions and criteria for each step they offer.
During this process, the lender looks at your finances to determine the maximum amount they may lend you and at what interest rate. They ask for your personal information, various documents, and they likely run a credit check. This process does not guarantee your approval for a mortgage."
Find the best rate
Start your search for the best mortgage rates in the country to give you an idea of what you can expect. With this information on hand, you can shop around with different lenders or mortgage brokers to help you find the best rate for your mortgage.
Be clear about what you can and cannot afford
It's always important to be realistic about what you can afford in the long run in terms of a mortgage and running a home. Even once your mortgage is nailed down, there will be other costs to consider, including closing costs on a home—these can add up!
(Read all about closing costs in real estate in this post next)
Make sure you're honest with your lender, broker, real estate agent, and yourself so you don't get in over your head and end up in a house you can't afford.
(You should also be on the lookout for signs you might be overpaying for a house. We cover three of them in this post)