Financing
Securing financing is a crucial step in your home-buying journey. Understanding the mortgage process and what lenders look for will help you position yourself for success. Here’s what you need to know before applying:
Pre-Approval
Nothing is more disappointing than finding the perfect home, getting your offer accepted, and then facing heartbreak of not getting approved. With financing as one of the biggest hurdles, it’s essential to be fully pre-approved—not just pre-qualified—before you start your home search.
With them sounding so similar, they often get mixed up. Here are the key differences:
Pre-Qualification: A calculation of how much you can afford based on income and debt. Think of this as a rough estimate.
Pre-Approval: A conditional commitment from a lender on how much you can borrow after reviewing your credit, job, income, and down payment funds.
A pre-approval lets you shop with confidence and can shorten the time needed for final approval when you’re ready to make an offer. With a shorter condition period and a pre-approval letter in hand, you strengthen your offer and put yourself in a better position to negotiate.
What Lenders Look at For a Pre Approval
Lenders assess several factors to determine if you qualify for a mortgage and for how much you’re eligible for. The main areas of consideration are:
Credit Score - A strong score shows financial responsibility.
Income & Employment - Stable income and employment to assure repayment ability.
Debt-to-Income Ratio - How much can you comfortably afford with your current income and monthly obligations?
Source(s) of Income - Are you mostly on commission? Self-employed? Do you have additional taxable income that is stable and consistent?
Taxes - Are you up to date on your taxes?
Down Payment - How much do you have and where did you get it?
Assets & Savings - A high net worth offers more security for the lender.
2. Mortgage Types
Fixed Interest Rates - Fixed rate mortgages are popular for their stability. Your interest rate and payments stay the same for the entire term you select, typically 2–5 years. This means no surprises if rates go up—you’re locked in. However, if rates drop, you might feel like you’re missing out on savings.
Another important consideration is the cost of breaking your mortgage early, whether by selling your home or paying it off. However, fixed rate mortgages often come with higher penalties for early repayment. If you prefer consistency, this might be the better option for you.
Variable Interest Rates- Variable rate mortgages typically start with a lower interest rate than fixed mortgages, but they come with the risk of increases over time. As we’ve seen in recent years, rising rates can affect your monthly payments or the time it takes to pay off your loan.
That said, with many experts predicting a drop in Canada’s policy interest rate in the near future, this could be a good time to consider going variable. These mortgages also offer more flexibility—such as the option to lock into a fixed rate during your term and lower penalties if you need to pay off your mortgage early.
3. Mortgage Stress Test
All borrowers in Canada must pass a mortgage stress test. This ensures they can afford payments even if interest rates rises. Lenders assess whether you can handle payments at the higher of your contract rate plus 2% or the Bank of Canada's qualifying rate (whichever is higher). This can impact your borrowing limit.
4. Additional Cost
Buying a home comes with both upfront and ongoing expenses that buyers should be prepared for. The initial costs include a down payment (a minimum of 5% of the purchase price), legal fees ranging from $1,800 to $3,000, and an inspection fee of approximately $600 to $800. In some cases, an appraisal fee may also be required. Additional expenses like property tax adjustments and moving costs should also be factored into your budget. Once you own the home, monthly costs will include your mortgage payments, property taxes, utilities, and home insurance, as well as expenses like internet, cable, and, if applicable, condo fees. Planning for these costs in advance ensures a smooth transition into homeownership and helps you manage your budget effectively.
Pros:
More Options: They compare multiple lenders, giving you access to more choices and competitive rates.
Renewal Flexibility: When your mortgage term ends, brokers can explore options across lenders, which is valuable if your financial situation has changed.
Personalized Service: Brokers tailor their recommendations to suit your unique needs.
Convenience: They manage the heavy lifting, saving you time and effort.
5. Working with a Mortgage Broker vs Traditional Banks
If you are financing, deciding between a mortgage broker or a traditional bank is one of the first steps. Even if you’ve been pre-approved, it’s never a bad idea to shop around or get a second opinion—doing so could save you thousands over the life of your mortgage
Mortgage Brokers
Cons:
Less Direct: You’re working through an intermediary, which may feel less hands-on.
Virtual Service: Many mortgage brokers work virtually, which means you may never meet them in person—this can feel less personal for some buyers.
Pros:
Familiar Relationship: If you bank with them already, the process might feel seamless.
In-House Offers: Loyalty perks or discounts may be available for banking clients.
Direct Service: The bank handles everything in-house, which can feel reassuring.
Bundled Services: Banks often offer discounts or incentives if you bundle services, such as combining your mortgage with other accounts, credit cards, or investments.
Traditional Banks
Cons:
Limited Products: Banks only offer their own mortgage products, which may not be as competitive.
Less Negotiation: Banks tend to have stricter policies for adjusting rates or terms.
Stricter Criteria: Approval can be tougher for those with unique financial situations.
Final Thought
Getting financed is more than just securing a loan—it’s about setting yourself up for long-term financial success. By understanding how lenders evaluate applications, getting pre-approved, and preparing for additional costs, you'll be in a strong position to move forward confidently.
Need help connecting with a mortgage professional? I can recommend trusted experts who can guide you through the process and help you explore your best options.