Whether you are applying for a mortgage for the first time, refinancing or re-negotiating your existing mortgage, a successful mortgage application process requires the completion of nine steps.
Steps in the Mortgage Application Process
Once you have determined that you are going to need mortgage financing, you can choose to work directly with a lender, or use the services of a mortgage brokerage and its licensed brokers and agents. You can work directly with many types of lenders such as banks and credit unions. Mortgage brokerages and their staff often have access to many of these same financial institutions. In addition, mortgage brokerages also have access to alternative, specialty, and private lenders, many of whom you can only access through a level 2 mortgage agent or mortgage broker (unless the lender holds a brokerage licence or is exempted from the requirement to do so). Mortgage, brokers and agents are licensed professionals who serve as intermediaries in the financing process, connecting you with the lender, and the lender with you. Mortgage brokerages (and their brokers/agents) have access to multiple lenders, and typically work on the borrower’s behalf to find a mortgage lender and product that suits your personal and financial circumstances.
If you plan to use the services of a mortgage brokerage, broker or agent in Ontario, make sure they are licensed. As the regulator, FSRA is responsible for overseeing the mortgage brokering industry in Ontario. Licensed mortgage professionals have met specific education, experience and suitability requirements.
Mortgage brokers or agents should provide you with information about their role, as well as other key aspects of the transaction, such as fees, services provided and the information you will be asked to provide. Be sure to ask questions and to get this information in writing.
Say “no” to cash payments
Never make payments, especially cash payments, without receiving a receipt. Note: all payments for mortgage broker services MUST be made to the mortgage brokerage and not to an individual. There should not be any surprise fees—you must be advised of these costs in advance of entering into an agreement. If a mortgage broker or agent asks for cash or payment made directly to them, say “no” and contact their mortgage brokerage and FSRA to report this conduct.
Once you have decided to work with a mortgage brokerage, broker, or agent, they will begin to collect information about you to ensure the product they recommend suits your personal and financial circumstances.
The mortgage application process requires you to provide specific documentation and details. To help make the process easier and faster, it’s a good idea to list your criteria ahead of time. Your mortgage broker, agent and lender will use this information to understand you, your goals for the mortgage loan or renewal, and the type of mortgage you want or need.
Be sure to include the following:
- Your financial circumstances
- Your assets
- Your sources of income and/or funds, including employment
- Your mortgage needs and objectives
- Your knowledge of mortgages
- Your preference in terms of amount, rate, term, amortization and conditions
- Your level of comfort with rate or market changes (known as your risk tolerance)
- Other parties to the transaction, if applicable
- Information about the property that will become the security for the mortgage loan, if already identified
- All debts you currently owe
- The amount of down payment you have saved if you are a new homebuyer
If you do not know much about mortgage financing, be sure to tell your mortgage professional, so that they can take extra time to explain the process. You should feel comfortable to ask questions about any recommendations, and be sure you understand before signing a contract
Using a Mortgage to Invest
One of the most common reason for a mortgage loan is for the purchase of a property. If you already own a property, you may be able to borrow against the property’s value and use the funds for something needed, such as renovations. In some cases, home owners will get a mortgage on their home in order to take that money and invest it elsewhere. Consider the risks before using borrowed money to invest. No matter what you choose to invest in, there is a risk that you could lose some or all of your money. If you borrowed against your home to invest, you would still be responsible for repaying the mortgage loan, even if your investments go bad. Failing to do so could result in additional fees, penalties, and/or default, which can lead to a power of sale or foreclosure.
Learn more about investing in alternative mortgage investments.
A lender is any business organization, person, or group of persons who loan out money, using real property, such as a home, as collateral. The property acts as the security, to ensure repayment of the loan. The lender provides the borrower with the money (the principal) and arranges to collect it back in installments over a specified period of time. The borrower and the lender enter into a contract which outlines the details of the repayment terms, including the interest rate, the payback time frame, the payment amount, and the payment frequency.
Based on the personal and financial information you have provided, the mortgage broker or agent will work to align your needs with a mortgage lender and product that is suitable for you and your circumstances, and make a lender/product recommendation.
Beware of offers that are too good to be true
You may be approached with offers and services to help you save money on your mortgage. Be careful before agreeing to any plan promising you mortgage savings, especially if it sounds too good to be true. These plans can come with fees and charges that cost more than the promised savings. When in doubt, ask another financial professional or mortgage broker for a second opinion.
It’s a good idea to get pre-approved for a mortgage before you start your search for a new home or a new mortgage lender. A mortgage pre-approval can help you establish and keep to a home-buying budget.
Ask your mortgage broker/agent you are working with to prepare a pre-approval application. Note: not all lenders will provide a mortgage pre-approval.
A pre-approval is a preliminary analysis of your financial needs and obligations, and is typically used for two purposes:
- To establish (and keep to) a home-buying budget (before you start looking); and
- To “hold” a specific interest rate for a specified period of time. This means that if you submit a full application within the specified timeframe and meeting any other conditions, the interest rate quoted to you on the pre-approval will still be valid, even if the rates for that product have gone up.
Unlike a full mortgage application, pre-approvals typically do not require supporting documentation. If you want the broker/agent or lender to help you calculate how much you can truly afford, you should be as accurate and honest as possible about your finances
Once complete, you should receive written confirmation of the maximum loan amount along with the mortgage rate. Keep in mind, a pre-approval does not guarantee you will be approved for the mortgage loan, and the offer is only good for a specified amount of time.
To complete a mortgage application, you will need to provide specific documentation. To help make the process easier and faster, collect this documentation even as you search for a suitable property. While lenders can vary on what is required, most require the following:
- Information about your employment, including confirmation of salary (e.g., a letter from your employer, a pay stub, a notice of assessment from CRA, bank statements, etc.)
- Information about any other sources of income you may have, if applicable
- Where you bank
- Proof of any assets, including RRSPs or a savings account
- Details of any loans or other debts, such as student loans
- For purchases: evidence of your down payment, including the amount and where it’s coming from
- For re-negotiating or changing lenders: a mortgage statement showing the current mortgage balance (or proof of free and clear title to the property)
- The full address of the property
- A copy of the real estate listing, if applicable
- Your mortgage pre-approval certificate, if one was issued
- Contact information for your lawyer or notary
- A copy of the agreement of purchase and sale, if applicable
- Estimates of your monthly housing costs (e.g., property taxes, utilities, etc.)
- Proof that you have the funds to cover any closing costs (a minimum of 1.5% of the purchase price, or more, is recommended)
Lenders, as well as mortgage brokers/agents, will rely on the information you provide. This information helps them find the right mortgage for you. It is critical that you are completely honest when providing them with information.
Errors in your application can easily lead to a mortgage that is not right for you or fit for your circumstances. Intentionally misstating facts or providing false information in your mortgage application can result in serious financial, and potentially legal consequences.
Lenders and mortgage brokers/agents are expected to ask questions and seek additional information in the event of inconsistencies with the information you provide. Different mortgage providers, brokers and agents may require different documentation.
Your mortgage broker or agent will need to make sure that you can afford the payments to carry your mortgage loan. They will do this by performing, at a minimum, certain debt servicing calculations and analysis, which compares your housing debt(s) and your total debt(s) to your income.
There are two main debt servicing calculations, which are expressed as percentages.
- Gross Debt Service (GDS) Ratio: This calculation assesses affordability by comparing your income to the mandatory costs for housing: the mortgage payment, property taxes, heating, and part or all of any condo fees, if applicable.
- Total Debt Service (TDS) Ratio: This calculation compares not only the housing costs, but also all of your other debts and obligations, such as credit cards, car loans/leases, personal loans, spousal/parental support payments, etc.
Lenders assess these debts and determine how much of the (gross) income is required to pay the housing costs (GDS), and the total debts (TDS). Each number has a maximum allowable percentage based on the lender and type of loan.
These ratios are guidelines only, and do not reflect a full picture of what you can afford. For example, if your GDS is 35%, this means that it takes 35% of your gross income just to pay for the housing expenses. If your TDS is 40%, you will be using 40% of your gross income to cover housing costs and your known debts and obligations. These ratios do not, however, take into account other elements of affordability, such as childcare costs, food, gas, cell phones, internet, etc. Just because you can qualify for a mortgage, doesn’t always mean that you can afford it.
As well as qualifying for the mortgage loan at the rate offered by the lender, you will also need to confirm you can carry the mortgage using the minimum qualifying rate. Known as the “stress test,” this rate is based on either the benchmark rate of 5.25 percent or the rate offered by your lender plus 2 percent, whichever is higher.
Stress test illustration
* Minimum qualifying rate applied since the 2% above the loan rate (2.99% + 2%) falls below the benchmark rate
This extra “stress test” is the Government of Canada’s response to concerns that borrowers are over-extended themselves and could run into difficulties in the future when interest rates rise.
All home buyers applying for a mortgage, refinancing or renewing their existing mortgage with a new lender are subject to the “stress test.” It assures mortgage lenders that the home buyer would still be able to afford the mortgage if or as rates increase.
Since the property is used as the collateral for the mortgage loan, the lender will require validation of the property’s value. This can be done in various ways, and can depend on many factors.
The lender might want to view the property online with you, view the property listing on Realtor.ca or a self-listing website, or obtain a property appraisal or home inspection to determine fair market value. If you are buying a property, you may need to negotiate access to the property with the sellers, and you will be responsible for paying appraisal and home inspection fees, unless a lender pays as an incentive for you to sign up.
Whether you are working with a broker or directly with a lender, you will be required to fill out the application.
The mortgage application will include basic information such as your name, address and telephone number, employer, income, number of dependents and the name and address of your bank or other financial institution. The application will also detail:
- Your assets (e.g., mutual funds, RRSPs)
- Liabilities (e.g., credit cards, credit lines, loans or leases)
- The purpose of the loan
- Mortgage loan amount required
- The type of mortgage loan
- The mortgage term and amortization
- Interest rate
- A description of the property, such as address, size, type and construction
During this process, the broker must explain the risk, obligations and fees associated with their service and with the mortgage contract. You will also need to sign a written acknowledgement confirming that your mortgage professional disclosed the risks associated with the mortgage. If you are dealing directly with a lender such as a bank, you will complete the application with them.
You will also need to sign a Credit Authorization Form giving the lender the right to perform a credit check. A mortgage broker/agent cannot and should not request a credit report without prior consent from you.
Once all paperwork, including the credit check, is completed, you will need to sign the mortgage application form, confirming that the facts on the application are correct. Read the application documentation carefully. Applications are sometimes presented together with client service agreements, which may include fees and when they become payable. Be sure to understand any references to brokerage and/or cancellation fees.
A credit report is obtained from a credit reporting agency, and provides employment, income and residence history, as well as information on any bankruptcies, collections, judgments, garnishments or liens against you. A main section of the report shows your debts and obligations, including monthly payment amounts, outstanding balances, and repayment history. The report captures how often you pay bills late and if you’ve gone through foreclosure or default in the past. The report will also come with a credit score—a three-digit score that tells the lender how likely you are to repay your loan at the agreed-upon terms.
Neither the lender nor your mortgage broker/agent can give you a copy of this report, but they can discuss it with you, and will note any credit challenges that are relevant to the mortgage financing being considered.
You can get your own copy of your credit history for your records (this cannot be used by a mortgage broker/agent or lender for their evaluation purposes). There are two main credit-reporting agencies: Equifax Canada Inc. and TransUnion of Canada. Both agencies give you the option to pay a small fee for near-instant digital access to your credit history and score. Another option, if you only want to see your credit history, is to request a free copy. Equifax requires you to call, mail a request or go in person to one of their offices. TransUnion gives you these options as well as the opportunity to fill out an online form.
Once your application is submitted, it may take a few days to a few weeks for the lender to let you know if the loan will be approved. The lender will prepare an approval, known as a “commitment letter.” This commitment letter is based on the information and documentation provided, and usually has a set of conditions that must be met in order to actually move towards completing the mortgage transaction. Any changes between the information/documentation that was provided to the lender could result in cancellation of the approval. For example, the commitment letter may indicate that it is conditional on your debt servicing ratios or credit score being at or above/below a certain number. If the lender reviews your credit report and finds a new debt or obligation that was not previously disclosed, or a significant change in your credit score, this may require renegotiation, or the lender could cancel the approval. The commitment letter outlines the details of the approval, including the total loan amount, terms and interest rate.
Make sure to carefully review all of the terms and conditions before you sign and return the commitment letter (the loan agreement). You may also wish to seek independent legal advice prior to signing.
Communication is Key to a Smooth Mortgage Approval
There are many moving pieces during the mortgage application process. To avoid errors and omissions, it’s important to concentrate on honest, effective communication. Errors in your application can easily lead to a mortgage that is not right for you. You should also be aware that misstating facts or providing false information in your mortgage application is illegal and can have serious consequences.
Don’t become a straw borrower
Never pose as the purchaser of a home or apply for a mortgage for someone else. Applying for a mortgage that is for someone else is called being a “straw borrower” and it is illegal. You will end up being responsible for the mortgage, face legal consequences and possibly be sued by the lender. If someone asks or offers you money to apply for a mortgage for someone else, say “no.”
Be sure to provide accurate information and legitimate documentation. Read all documentation carefully and, where necessary, ask questions or seek outside legal counsel. Finally, never sign an incorrect or incomplete document.
Remember, cooperation and communication ensure a smooth and stress-free mortgage approval process.
- Learn more about Working with a licensed mortgage professional
- Learn more on Shopping for a mortgage
- Read more on Signing a mortgage contract