The Canadian housing market has been dealing with the affordability crisis for a long time. However, in recent times, the crisis has become more acute, making homeownership feel like an almost impossible dream for major Canadians.
Fortunately, with the help of mortgages, investing in these expensive assets is still possible for many first-time homebuyers. A mortgage loan lets you spread the purchase price of a home into monthly payments over a long period of usually 15 to 30 years.
However first-time homebuyers, you need to keep in mind that the mortgage application can seem like an overwhelming and stressful process for you since this is your first time. This is why you need to know the steps involved in the home mortgage application beforehand. By familiarizing yourself with the entire process, you’ll feel more confident and prepared to handle this crucial step of the homebuying journey.
Step-by-Step Guide on How to Apply for a Mortgage Application
STEP 1 - Review and Get Your Finances in Order
There are a few steps that you need to do before you start looking at homes and talking to mortgage lenders -
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To qualify for a conventional mortgage in Canada, you need to have a minimum credit score of 680. So, before you apply for a loan, check your credit score and work to improve the score if it’s below 680. And in case you see that there is inaccurate information in your credit scores that is negatively impacting your score, report it immediately.
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Another step that you need to do to improve your chance of getting a loan is to keep your debt-to-income ratio, below 43%. In case your DTI is higher than that, consider paying down debt or increasing your income before you apply for a loan.
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Fix a realistic budget for your home-buying by tracking your income and expenses. This budget must include both upfront and ongoing expenses including the monthly mortgage payments.
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Save for the down payment of your new home as early as you can. The more money you put upfront, the smaller your loan amount will be (meaning lower monthly payments). Apart from pooling money for the down payment, you need to save money for other upfront expenses involved in home-buying such as closing costs, home inspection fees, property taxes, and others.
STEP 2 - Look at the Different Loan Options Available
The lenders you’ll be considering will explain to you different mortgage options along with the best loan for you. However, make sure to do your own research too about different loan options beforehand. Thoroughly learn about how the different loan options you can apply for and its list of pros and cons.
By researching beforehand, you gain a good understanding of the various loan options available. This enables you to ask insightful questions to lenders, compare offerings effectively, and avoid getting pressured into a loan that’s not best for you.
STEP 3 - Get Your Documents and Paperwork in Order
To avoid hassle and rush at the last minute, gather your paperwork before applying for the mortgage loan. These are the basic documents that need to be there in your loan application packet -
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Pay stubs for the last 2-3 months
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Proof of any additional income
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Tax documents such as T4 slips, and T1 General Tax Return
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Bank statements covering the last 1 to 2 months
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Debt statements
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Proof of assets
STEP 4 - Compare Mortgage Lenders and Get Preapproved for Your Mortgage
Now that the groundwork for your successful mortgage application is laid, it’s time to find the “best mortgage lenders near me.” Make sure to get quotes from at least 3 mortgage lenders. This could be a bank, credit union, or private mortgage lender. Beyond the interest rates, compare the Annual Percentage Rate, loan fees and terms, and other eligibility requirements.
Finally, select a mortgage lender who is offering a loan that best fits your financial situation and get the mortgage pre-approval from the lender. Remember that a pre-approval letter doesn’t guarantee loan approval. It’s just a preliminary assessment by the lender based on the information you have provided.
STEP 5 - Kickstart the House-Hunting Process
Now that you have an idea of how much house you can realistically afford, start looking for houses for sale.
STEP 6 - Finalize Your Mortgage Application
Once you have found the perfect house and the seller accepts your offer, proceed ahead with finalising the mortgage application. This is when you must submit the verification documents we asked you to put in your loan application packet.
You can choose to complete the mortgage final application process from the lender who gave you your pre-approval letter. Or you can choose new mortgage lenders for this step of the process. The lenders will provide you with a loan estimate within around 3 business days of receiving your application.
This loan estimate document will outline the loan type, interest rate, loan amount, monthly payments, and closing costs. Make an apples-to-apples comparison to find which mortgage loan is best for you and proceed ahead with a loan for home-buying.
STEP 7 - Get the Home Inspection and Appraisal Done
This stage when your loan is under processing with a mortgage lender is called the underwriting process. While the lender verifies your personal and financial information, you need to tick home inspection and appraisal tasks off your list.
If the appraisal value of the home is below the purchase price, your lender won’t approve your loan as-is. In that case, you’ll have to increase your down payment to lower the purchase price or ask the seller to reduce the property price.
STEP 8 - Stay Put Until Underwriting Is Finished
The mortgage underwriting process usually takes around 30 to 60 days. During this time, you must stay patient and avoid doing anything that can affect your application like opening new credit cards or making a large purchase.
Your mortgage lender may also need additional information from you during the underwriting stage. So, you need to be responsive to their requests and complete action items right away to avoid delays in the mortgage application process.
STEP 9 - Close the Mortgage and Officially Become a Homeowner
Once the underwriting process is done, the closing day can be scheduled. At the closing meeting, get set to sign a lot of documents and ask any remaining questions you may have about the mortgage or the property. After everything is signed and handed over, you’ll receive the keys to your new property and will officially become a homeowner.
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The More You Know About the Mortgage Process, the Smoother Your Experience Will Be
Learning and knowing about the mortgage application process as much as you can empower you as a homebuyer. Understanding all the key steps involved in this process, from pre-approval to closing helps you prepare and navigate the process smoothly and confidently. This knowledge will also enable you to ask informed questions to mortgage lenders and avoid potential roadblocks. Ultimately, being informed empowers you to make the best financial decisions for your biggest purchase - your dream home.