Criteria for Mortgage Qualifying

You must be wondering what criteria lenders use for approval of a mortgage application. Every client situation is different and there may be different programs available with different lenders. Contact us for a free consultation.

Mortgage underwriting procedures in Canada are based on four criteria’s:

  1. Property Standards
  2. Mortgage criteria
  3. Credit analysis
  4. Borrower qualification

Let’s examine each of these criteria briefly.

Property Standards

The property must be marketable so that lenders can sell and recoup the loan in the case of default. Even if the borrower is an excellent candidate for financing, if the property does not fit the lender’s risk tolerance profile, the loan application may be approved with the terms the borrower is looking for, or approved at all.

Mortgage criteria

Part of qualifying a borrower, involves assessing the type of mortgage required in comparison to the risk involved. One way to do this is to calculate the loan-to-value (LTV) ratio. The LTV is the relationship between the value of the property and the amount of the mortgage loan. It determines whether mandatory default insurance is required or not. The maximum LTV for property insured by Canada Mortgage and Housing Corporation (CHMC) and Genworth is 95%. Typically, the maximum loan available without mortgage default insurance is 80% LTV. The insurance premium depends upon the LTV as outlined on various mortgage insurance company websites:

Credit analysis

Previous credit management history provides information on the borrower’s willingness to repay debt, credit stability, and repayment reliability. An analysis of a borrower’s credit also provides information on how much credit is at the borrower’s disposal., which may affect his or her debt load after a mortgage loan is granted.

All mortgage lenders, when considering a borrower’s qualification, use a standard referred to as the Five C’s of Credit to evaluate a borrower’s ability to repay a loan.

Character: The borrower’s current employment and length of employment determines the individual’s job security. The bottom line is this: Is the individual a reliable or a high-risk borrower?

Capital: The amount of money the individual is investing in the property. As well, the lender checks and verifies other assets and liabilities to determine the net worth.

Capacity: The ability of the borrower to repay a loan. The lender determines the individual’s Gross Debt Service Ratio (GDSR), as well as the Total Debt Service Ratio (TDSR). These calculations help determine the ability of the person to repay and also help check the percentage of debt for the allowable limits.

Collateral: The property used to secure the loan. This includes value, condition, location and property type.

Credit: The borrower’s past records of loans and repayment. Lenders examine the applicant’s credit records and how he or she has handled debt in the past.

Borrower qualification

Lenders have established levels of debt service that they will accept in order to consider an applicant for a mortgage loan. There are two debt service ratios (GDSR and TDSR) that determine whether or not the borrower will qualify.

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