Preparing to get a mortgage
Before you start shopping for a mortgage, assess your financial situation. You may take steps to ensure you’re financially ready to buy a home.
Checking your credit report
A potential lender will look at your credit report before approving you for a mortgage.
Before you start shopping around for a mortgage, order a copy of your credit report. Make sure it doesn’t contain any errors.
If you don’t have a good credit score, the mortgage lender may:
- refuse to approve your mortgage
- require that someone co-sign with you on the mortgage
Learn how to get your credit report.
Staying within your budget
You need to prove to your lender that you can afford to repay the requested amount. This is an eligibility criterion.
Mortgage lenders and mortgage brokers use your financial information to calculate your monthly housing costs. They also calculate your total debt load.
Lenders and brokers consider information such as:
- your income (before taxes)
- your expenses (including utilities and living costs)
- the amount you’re borrowing
- your debts
- your credit report and score
- the amortization period
Total monthly housing costs
Your total monthly housing costs shouldn't be more than 39% of your gross household income. This is the gross debt service (GDS) ratio.
You may still qualify for a mortgage even if your GDS ratio is slightly higher. However, you’re increasing the risk of taking on more debt than you can afford.
Your monthly housing costs include:
- your mortgage payments
- your property taxes
- your heating costs
- 50% of your condo fees (if applicable)
Total debt load
Your total debt load shouldn't be more than 44% of your gross income. This includes your total monthly housing costs plus all of your other debts. This is the total debt service (TDS) ratio.
You may still qualify for a mortgage even if your TDS ratio is slightly higher. However, you’re increasing the risk of taking on more debt than you can afford.
Other debts may include your monthly payments for:
- your credit card balances
- your car loans
- your lines of credit
- your student loans
- your child or spousal support
- any other debts
How the stress test impacts your qualification
Federally regulated entities, like banks require that you pass a stress test to get a mortgage. Lenders that aren’t federally regulated may also ask you to pass a stress test.
This means that you need to prove you can afford payments at a qualifying interest rate. This rate is typically higher than the actual rate in your mortgage contract.
Banks must use the higher interest rate of either:
- 5.25%
- the interest rate you negotiate with your lender plus 2%
That's the case for insured and uninsured mortgages.
If you already have a mortgage, you’ll need to pass this stress test if you:
- refinance your home
- take out a home equity line of credit
Use the Mortgage Qualifier Tool to see if you can qualify for a mortgage.