When you’re ready to buy a home, one of the first things you’ll have to think about
is whether or not you can qualify for a mortgage. Lenders will look at three things: your credit
score, your down payment, and your debt servicing ratios. We’ve brought in mortgage broker
James Laid to walk you through each in more detail.
The first factor that we’re going to discuss is credit scores. Credit scores in Canada
range from three-hundred to nine-hundred. Ideally, you’d find yourself in the category
between six-hundred-and-eighty and nine-hundred. Canadians who find themselves in this category
would satisfy any lenders’ credit requirements.
The next group is the range between six-hundred and six-hundred-and-eighty. This group has
average credit so, depending on the rest of the details on their mortgage application,
they may qualify for a prime mortgage or they may not.
The final group is those Canadians who find themselves with a credit score below six-hundred;
they will still qualify for a mortgage, however, it will be with a B-level lender at a higher
So now let’s discuss what determines your score on this range. And there are two main
factors. The first one is fairly simple: simply making sure that you pay your monthly bills
on time. And the second one is insuring that your credit balances are low in comparison
to their limits.
For example, if you have a five-thousand dollar credit card then you should make sure that
your balance stays below two-thousand-five-hundred dollars, or fifty per cent of that credit
limit. This is what determines your score on this range.
The second factor for qualifying for a mortgage in Canada is down payment. And to help us
explain this, we are going to assume that a Canadian has just purchased a home for three-hundred-thousand
dollars. If this person plans on occupying the home, the minimum down payment is five
per cent. Using our example of a three-hundred-thousand dollar value, that would equal fifteen-thousand
If that person wants to avoid paying CMHC insurance, or if this is an investment or
rental property, then the minimum down payment goes up to twenty per cent. So, again using
our example of a three-hundred-thousand dollar home value, that would increase our down payment
to sixty-thousand dollars.
So these are the minimum down payments required for qualifying for a mortgage in Canada, depending
on the specifics of the property you’ve purchased.
The third and final factor that lenders look at when determining if you qualify for a mortgage
is debt servicing ratios. And to help us understand this concept, let’s look at an example.
So we have a household where Mary is earning sixty-thousand dollars and her husband John
is earning forty-five-thousand dollars. So this household has a total annual income of
one-hundred-and-five-thousand dollars. The lender will then compare this income to the
monthly expenses that the household incurs.
They likely have existing expenses such as their car payment of four-hundred dollars
and maybe some student debt that’s still leftover from when they went to university.
The lender will look at the income, look at those expenses, and then determine is there
enough income leftover to service a purchase of a home, because the household would then
have a mortgage payment and also have to pay the monthly property taxes.
We’ll go into detail about how this ratio works specifically, in a later video. But
at a high level, a lender needs to determine that the household income is enough to service
all existing debt and mortgage-related debt due to a home purchase.