What Are Lenders Looking For When Approving A Mortgage?
Updated: Oct 30, 2021
We all know that it is very nerve-racking to approach a lender for any type of mortgage financing. It is a given that a lender will be carefully assessing your overall financial picture which can be daunting for anyone involved in the process, well, for most of us.
This is a reality that must be faced when a borrower is looking for mortgage financing. The process is necessary to secure the terms on a mortgage loan and the terms will be different based on your unique financial circumstances.
Do all lenders demand the same criteria? This is a question that is worth exploring. The reality is that Ontario is blessed with many lending opportunities for a potential homeowner. Lenders have been conveniently classified in the mortgage sector into three broad categories to further narrow down the lending playing field. Ultimately matching the borrowers with the best lending fit.
A (also referred to as, prime or major banks) lenders - Banks have the most stringent lending criteria. Putting borrowers through rigorous mortgage stress tests as well as demanding strong credit scores and substantial household income to qualify for mortgage loans. Examples of these banks are; Scotia, TD, CIBC to name a few.
B (also known as alternative lenders) lenders - While not requiring such stringent criteria for mortgage approval, credit and income are still qualifying factors, although they are reviewed much differently in comparison to an A lender. A few examples of these lenders are; Home Trust, Equitable Bank, B2B Bank.
C lenders - Private lenders fall into this third category of Ontario lenders. Private lenders can lend individually or as a corporation. Private loans are short-term mortgage loans (12 months or less) that do not qualify a borrower per se. Approvals are mainly based on factors such as location of the property and the amount being borrowed. Credit score and credit history however does play a role in determining rate and fee. A low credit score or no income does not mean no approval, once you have equity in your property there will be private lenders that will approve a loan.
These are just brief summaries of A, B and C lenders; to understand fully, connect with your go to mortgage agent -- me
What Do All Lenders Need To Provide Mortgage Financing?
Regardless of which type of lender an Ontario borrower may choose to go with, from a lending perspective, there are still broad criteria that most lenders will be looking for when determining mortgage loan eligibility:
Creditworthiness - even if a borrower seeks private mortgage financing for a short term, strong credit will open up borrowing doors down the mortgage road.
Calculated Income - the majority of Ontario lenders will prefer to see traditional income. However, because not all borrowers are alike, different income structure is reviewed differently by the different type of lenders.
A recent appraisal of your home for a second mortgage - Lenders will be assessing the location, current condition, and appraised value of your home for mortgage options; these mortgage options being a second mortgage or a refinance. Purchase transaction only if the borrower(s) is putting 20% or more as a down payment.
Low Debt Ratio - When providing mortgage financing, lenders will not want to see too many outstanding liabilities (income must outweigh monthly debt payments).
Think Like a Lender!
To tackle the borrowing process head-on you simply have to think like a lender. Put your lenders' hat on. If you were lending out money what would make you feel most comfortable? In a nutshell, low debts compared to incoming salary, a solid credit score with a history of paying back creditors on time, and any additional financial assets to help leverage a loan.
Most importantly, a borrower who will pay on time and in full every month is every lender's dream. If you know what a lender wants this will make it far easier to understand the process.
I am here for all your mortgage needs.