Purchasing a house is a life-changing step that most home buyers can't afford without a bit of help. That's why most Canadians turn to mortgages when they're ready to commit to their dream homes. However, most first-time property shoppers aren't ready for the piles of paperwork attached to the mortgage application process. Shopping for a mortgage is far more than having to decide between fixed or variable rates or the length and conditions of the mortgage loan. Buying a home is the single largest purchase most of us will make in our lifetime, and taking the time to be prepared makes all the difference. And being prepared, means having all of the necessary documentation ready and up to date.
Below, we'll look at what information is needed for a mortgage application to prepare you for your upcoming property purchase. Keep in mind however that while this list is ample, it's may not be exhaustive. Certain mortgage lenders may have different requirements so be sure to communicate with them beforehand to ensure that you are provided with a checklist of exactly what you will need. If you are dealing with a mortgage broker, then your broker will have a good idea of what the lender requires.
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What Is a Mortgage?
Before examining what information is needed for a mortgage application, let's first touch on what mortgages are and how their applications work.
A mortgage is a loan, often from a bank or independent lender that prospective home buyers use to purchase property. Mortgages are standard across the property-purchasing population because most people don't have the funds to buy a house out of pocket or don't want to exhaust their savings all at once. With a mortgage, the bank, or lender, gives you the lump sum required to buy a home, and you pay it off in small increments for a period of time, usually 15 to 30 years. Once a mortgage is approved, and the home is in your possession, your home is now collateral in the event you are unable to pay your loan back.
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Mortgage Application Requirements
Because mortgage amounts are often hundreds of thousands of dollars, lenders want to ensure that you have the financial means and credit history to pay it off. During the mortgage application process, your lender requests dozens of documents reflecting your income, credit history, and financial responsibility. The amount of documents you will require for your mortgage application are plenty, so it's best to prepare a binder or file to keep them them all together and possibly sectioned off. We recommend the creating the following sub-sections in your mortgage application kit:
Banks need to verify you are who you claim and that you're actually intending to purchase a home before issuing a mortgage. Fortunately, most lenders don't ask for much identification and advance you through the process with the following documents.
- Government-issued ID, such as a driver's license or passport (with your current address)
- Social Insurance Number (SIN) card
- If you cannot find your SIN card, knowing the number is enough in most instances
Proof of Income and Employment
A mortgage is an expensive investment, even with a hefty down payment for a relatively cheap house. Because of the finances involved, banks want to see these forms, letters and other documents to confirm that you have steady employment and a sizeable income.
Tax return forms show two bits of information that mortgage lenders want to see. First, they show precisely how much money you make yearly and where you make it. And second, they reveal if you have a history of paying your debts (in this case, taxes) on time.
It's standard for lenders to request your T1 and T4 tax forms during mortgage applications or a T4A if you're self-employed. In most cases, you only have to submit your documents from the previous year.
Pay stubs are the most straightforward way for a bank to see that you have a job and make enough money from it to purchase a house. Most lenders request three months of payment history as verification, but if you have recently changed jobs, you can prove income with a letter of employment. Paystubs will be required regardless if you work seasonally, part-time or full-time.
Letter of Employment
Even with a stable tax history and a suitcase full of pay stubs, some mortgage lenders request a letter of employment to ensure that your finances are steady. Letters of employment are often completed by official representatives of the company; those who hold signing authority. They also confirm what your employment status is, be it seasonal, part or full time.
This written and signed confirmation letter from your employer verifies your employment history, rate of pay, guaranteed work hours, and any other information the bank needs to confirm your wages. It is imperative that letters of employment be completed on company letterhead and are not more than 30 days old.
Applying for a Mortgage While Self-Employed
Even though you don't have traditional pay stubs or a letter of employment while self-employed, you can still apply for a mortgage, but the process is more demanding.
Most banks require three years of payment history rather than three months. Additionally, many want to see your business license and articles of incorporation to confirm you're making a steady income from a verifiable business. As well, you will need to disclose whether or not you are the sole proprietor or in a simple partnership. Your business will most definitely undergo a credit check also.
A financial portfolio involves much more than your employment history and salary. Therefore, most mortgage lenders request documents that give a broad view of your finances, including a list of your investments and a detailed credit report.
Bank statements are a more accurate way to gauge a person's finances than their pay stubs, since bank statements reflect deposits from additional sources and withdrawals for regular expenses and possible loans. Because of this, most lenders request at least six months of consecutive, complete bank statements before approving you for a real estate loan. In most cases however, 3 months of bank statements are enough for a lender to gain a clear picture of your account activity. If you have multiple bank accounts, we recommend generating 3-6 months of reports from each of them. It is always best to be forthright with lenders about all of your financial ongoings, then to be denied a loan for not doing so.
Mortgages are loans, just like any credit card purchase. Therefore, lenders request a comprehensive credit report before approving you for a mortgage to ensure that you have a history of repaying your loans. A credit report will be required regardless but it's always wise to know exactly what it looks like beforehand. Not only will knowing your credit score help you anticipate your mortgage rates, but it will assist you in looking for a home within your budget. As 25% of people find discrepancies on their credit reports, knowing ahead of time what it looks like will provide enough time and space to resolve the issue with the Equifax or TransUnion, the two major Canadian credit bureaus.
Your investments in the stock market and real estate are vital to determine your net worth accurately, and lenders want to know about all of them before finalizing your mortgage. Submitting a comprehensive list of valuable assets can even lower your interest rate. More to that, if the net income shown on your paystubs falls short, your assets can support your application. Assets can include:
- Physical assets: property, cars, valuables, furniture, inventory.
- Nonphysical assets: retirement accounts, stocks, bonds, cash and equivalents, investments.
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We've looked at how lenders verify that you can repay your monthly mortgage payments, but what information is needed during a mortgage application to confirm that you can cover your down payment?
Down payment funds are easier to prove than financial stability and responsibility, so most lenders give you several ways to show you have the lump sum ready. The four most common ways to show your down payment stability are:
Three-Month Savings Statement
Some mortgage lenders request your savings statements over the last three months since most people store their down payment funds in a savings account.
Down payment amounts vary depending on your property, lender, and personal finances. However, three months of dedicated savings and transfers from your chequing account is enough for most home buyers to cover their initial costs.
Canada's Registered Retirement Savings Plan (RRSP) lets you withdraw up to $35,000 yearly for property purchases under the First-Time Home Buyers Plan and most lenders let you use your withdrawal statements as down payment verification.
You can also submit a gift letter if someone else covers your down payment. A gift letter is a written and signed note expressing the intention to submit a down payment on the mortgage applicant's behalf without them needing to repay it.
Sale of Your Existing Property - Agreement of Purchase
If you are selling your existing home, a lender will require a copy of the agreement of purchase it is to be used towards your down payment.
Other than ID verification and financial information, what information is needed for a mortgage application? Truthfully, you won't need to submit much outside an extensive list of financial documents. Still, mortgage lenders require comprehensive information on your new property purchase to ensure you use your loan appropriately.
Mortgage lenders require you to submit your new home's address and postal code to verify its legitimacy and allow the lender to appraise the property.
The sale agreement is a written document signed by you and the property seller showing that you intend to purchase the home and that the seller plans to give you the property for the agreed-upon price, which you should also list on the agreement.
The sale agreement also shows that you're taking out a mortgage for its intended purpose and are not scamming the lender.
Real Estate Listing
Real estate listings give mortgage lenders an accurate sense of your fees beyond the property value, including the property tax and utility expenses. Those secondary expenses are vital in determining your down payment and closing costs. If the property is newly purchased, an MLS listing will suffice as details of the property.
What Happens After the Mortgage Application?
If you submit all the proper paperwork and your records meet your lender's standards, the next step is to submit your down payment and closing costs. After those initial expenses, your lender officially approves your mortgage application, and you can complete your purchase.
Compare Mortgage Rates with Insurdinary
Purchasing your dream home is a rewarding investment, but it can be a stressful process. In addition to spending months comparing houses, negotiating prices, preparing to move out of your old home, and learning what information is needed for a mortgage application, you also have to find lenders willing to lend you the capital.
At Insurdinary, we take some of the home buying stress off your hands by comparing rates from Canada's most trusted mortgage lenders and sending you mortgage options. We also find quality home insurance quotes after you move in to protect the asset you just spent months purchasing.
Fill out our online form to get mortgage rates today, or contact us at email@example.com to learn more.