Mortgage Approval Process in Canada

When it comes to finding out the mortgage approval process, the devil is in the details. Whether you are going through the process for the first time, or are a seasoned veteran, getting approved for a mortgage is a process you should know and understand. Below, we will go through the process and answer some of the questions you might have regarding your mortgage application, pre-approval process, and everything else.

How long does it take to get approved for a pre-approved mortgage in Canada?

If you are looking for a mortgage pre-approval, the average approval time is relatively quick. Most mortgage brokers have a bank or a set of lenders that they always use for a pre-approval as they can get the answer back in days instead of weeks. The pre-approval mortgage process is similar to the mortgage approval process but does have less of a threshold in terms of approval.

Most lenders will provide a pre-approved mortgage for serious buyers and want to get an idea of how much their monthly payment would be with a mortgage. These pre-approvals are only to give a rough estimate and secure an interest rate for a specific period. Although you might be pre-approved by a particular lender, it might not mean that the lender can approve you for a mortgage as the mortgage approval process uses set stress tests and internal risk calculators to see if you approve.

To get a mortgage pre-approval, you should expect to provide the lender or your mortgage broker with your current income, debt load, including any credit card, loan, student loans or monthly payments. Further to this, you should expect to have a budget in mind, along with how much you want to put down for a down payment on a property. It is essential, to be honest with these numbers, as no matter, if you have good credit or poor credit, your broker or lender will find out, and it may make the home buying process a little more complicated.

Specific lenders may ask for other documentation, but pre-approvals are often quick, easy and generally pain-free to secure. Remember, you are not locking in with a specific lender when you get a pre-approval. Instead, you are reserving an interest rate and getting a baseline on what you can afford for your home buying search.

How long does it take for a mortgage application to be approved?

When it comes to securing your financing for your home, it can be a bit of a stressful process. With the current market and the ongoing COVID-19 pandemic, mortgage approvals have been delayed at the big banks. Even a year into the pandemic, the big five banks struggle to keep up with mortgage approvals and have seen waits of up to six weeks for a client to get a meeting. However, the smaller specialized lenders and credit unions have adapted quickly and have embraced the work from home model with their approvals.

For the standard mortgage, you should be looking at roughly two weeks from initial application to approval. It will depend on many factors, including the complexity of the purchase and any issues with your application. If you are self-employed, be prepared to add a few days to see if your income will qualify as it is often complex.

If you are working with a mortgage broker, the time can be even quicker, but again it will depend on the lender and your file’s complexity. Many buyers in the market are waiving financing conditions due to the length of time these processes are taking with the big five banks. It is undoubtedly a risk, but it might be worth it, depending on your risk-level and financial situation. It is best to chat with a certified financial advisor or a mortgage broker if you think about foregoing this protection when bidding on homes.

Thus, you should budget at least a month or more to be safe when trying to guess when your mortgage will be approved. Some mortgages will be approved within the week, while others will take a little bit more time. Either way, giving yourself some leeway is the best way to ensure no issues with securing your financing and moving into your dream home.

What are the basic steps of the mortgage approval process?

Naturally, a pre-approved mortgage and securing a mortgage is a slightly different process. Here are the basic steps in which you and your lender or broker will follow. One thing to note, items may be somewhat different, but these are the typical steps that we have seen over the years.

Step One: Provide updated information to your broker or lender

Whether you are working with the same lender that you got your pre-approval from or are working with a brand new lender, you need to provide some basic or updated information. This information will include things about the home you bought, including the total mortgage amount, the down payment amount, monthly mortgage payments, condo fees and the purchase price. On the personal finance side, you will need to prove your monthly income, any debts that you pay on a regular occurrence such as lines of credit, student loans, a credit card and your current credit score. This information will help your mortgage lenders or mortgage broker run the numbers and start the paperwork for your mortgage.

Step Two: Providing supporting documents

Once you send in your information, your broker or mortgage lender will need to prove the information you provided. On the house side, you will need to send in your down payment confirmation, purchase agreement of the property, closing costs, and any other supporting documents that your real estate agent or lawyer have provided. On the personal finance side, you will need to send in proof of income, bank statements to showcase where the money has come from for your down payment, credit rating from a credit bureau and any other information that mortgage lenders may need, such as a form of picture ID and your SIN number etc. If you are self-employed, you will need to work with your lender to provide your employment income over several years to show to lenders.

Step Three: Work with your lender to select a mortgage product

When it comes time to get a mortgage, you will have many options for the actual home purchase and mortgage. You will need to consider things such as the length of the mortgage term, the type of mortgage and if the mortgage will be open or closed. These options will impact your overall mortgage rate and the interest rate you will agree on. If you are curious about the best option for you, it might be worth looking at our mortgage calculator before making these important financial decisions.

Step Four: The stress tests

The next step in the process is for your mortgage lender to go through their own internal approval process. The bank or lender will run the numbers for your current financial situation and the numbers for your proposed home purchase. The report that is generated is two-fold. The first is related to your debt ratios. The second will determine if your credit score is high enough to meet the minimum qualification standards for a mortgage in Canada. Obviously the better your credit score, the easier it is to secure a mortgage. Do note; these tests will be based on a stress test, not the current interest rates in the market. As well, the stress test rules will change on June 1, 2021, and details can be found here.

Step Five: Sign the lender documents

We have reached step five, and you are almost there. The next step of the process is signing your lender documents. Your lender or mortgage broker will walk you through the entire process. You will need to sign several forms, and in today’s market, you may sign virtually or in person. Make sure to check all of the documents and ensure that your mortgage is the proper mortgage rate, interest rate and loan amount.

Step Six: Sign the legal documents

Finally, you will need to meet with your lawyer and go over the purchase agreement and the rest of the legal documents. This meeting will allow your lawyer to discuss the purchase package and include reviewing the mortgage documents, title transfer and any other forms that you may need to sign. Your package will have several vital records which you may need to use in the future. These documents could include the builder’s draft, the current set of plans for your home and even the property lines of the lot.

How do Canadian banks determine a mortgage approval?

Canada’s banks and lenders use the same rough process, no matter the lender. For these institutions, the specific lender will use a technique called mortgage underwriting. This process will provide you with a risk portfolio from the lender and determine if you qualify for a mortgage. It is a cut and dry process that uses four key factors to determine if you are a good candidate for a mortgage.

Income

The first and possible most significant factor in terms of mortgage underwriting is your income. Your income is more than just your take-home pay; it looks at what you can afford based on your current debt loads and other factors. Your yearly income will come into play, and things such as debt related to credit cards, loans, and car payments. These numbers will all be crunched and then put through a stress test. The stress test is not at current market rates but rather a higher interest rate to ensure that you could afford a mortgage if the interest rates were to spike overnight.

Credit

Naturally, lenders will want to look at your credit history and see if you have good credit or poor credit. Credit is important to lenders as it provides them with a detailed look at how you have acted with other forms of credit and what your payment history is with those loans or credit cards. This kind of data will allow a lender to be more comfortable providing a loan to you, especially as you have demonstrated that you can pay lenders on time and in full.

Down payment and other financial tools

Lenders want to see that you have equity that you can leverage to purchase the home you intend to buy. The lender will want to see a down payment and proof of how that down payment was funded. Further to this, they will want to see a sum of money to cover closing costs and any other equity that you have in your name, whether through investments, RRSP or even savings. Long story short, the lender will evaluate your risk portfolio based on what you are bringing to the table and if it is enough to justify providing you with a loan.

Property details

Finally, the lender will want to know about the property you are buying. The lender will want to know the home's appraised value, the purchase price, and the current condition. This is especially important as lenders do not want to be on the hook for extra funds due to a bidding war. For instance, if your home is appraised at $500,000 but your bid was $750,000, the lender may not want to cover the extra $250,000. If this is the case, you would need to find the missing $250,000 by the closing date either through savings, or an additional loan to cover the cost. It is best to chat with a mortgage broker if you are curious about this and what you can do to help prevent it from happening. Based on these four factors, the lender will calculate and then either approve or deny your mortgage application.