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Mortgage Applications: Lenders’ Financial Considerations

Mortgage Applications: Lenders’ Financial Considerations
7 min. read

Image: IvanMichailovich / Shutterstock.com

Are you planning to buy a home in the near future? Unless you can afford to pay for the property in cash, you’ll need to take out a mortgage. A mortgage represents a lot of money for lenders; they won’t just hand over money for any reason. Lenders consider several factors when deciding whether to approve your mortgage application. Let’s take a closer look.


The first thing lenders consider is your income. Not only do they care how much you make, but they are also interested in the stability of your income.

If you’re a full-time, salaried employee, you’re golden in the eyes of lenders. Most lenders allow you to use your annual salary or a two-year average – whichever is greater – in your application. Noting the two-year average can be advantageous if you receive a bonus, for example, and can allow you to qualify for a higher mortgage. Keep in mind that if you are on probation, the lender may not allow you to use any of the income from your job to qualify for the mortgage.

Full-time, hourly workers can usually qualify for a mortgage by annualizing their earnings. To do this, multiply your hourly rate by the number of guaranteed hours per week. Then, multiply this number by 52 weeks. Hourly employees can also apply with their two-year average if it is greater.

If you’re part-time but are guaranteed a minimum number of hours, you can still use the formula above to calculate your annualized earnings for mortgage qualification purposes. But, if you are part-time and your hours aren’t guaranteed, a lender would only be able to use your two-year average.

Unfortunately, those who have been working for their current employer for less than two years may be out of luck – unless they have worked in the same industry for many years with a similar income. In these cases, the lender may make an exception and allow you to use the income for mortgage qualification purposes. It all depends on the lender and how your mortgage broker presents it to them.

In general, non-permanent employees working on contract won’t be allowed to use that income to qualify for a mortgage. However, some lenders may make an exception if your mortgage broker is able to build a strong case for you. For example, if you’ve been working in the industry for many years earning a similar income, and you can show that your contract is likely to be renewed, a lender may let you use the income in your application. But, there’s no guarantee.

A common misconception is that you can’t get a mortgage if you’re self-employed. While it is more difficult to qualify for a mortgage when you’re self-employed, it is still possible. Lenders generally take the two-year average of your net (post-tax) business or professional income, which appears on your tax return.

Many individuals who are self-employed write off as many of their expenses as possible. However, this can make it difficult to qualify for a mortgage if you’re only showing a minimum income. If you’re planning to buy a property, you’ll need to decide whether you’d like to declare more income in order to get a better mortgage rate, or declare less and pay a higher mortgage rate. Your mortgage broker and accountant can help you work through your options.

If you’re currently on maternity leave or will be soon, you may be wondering how mortgage lenders will consider your income. Fortunately, as long as you have a return-to-work date, most lenders will allow you to use your full salary rate or a portion of it. Most lenders allow 60% or 100% of your salary – depending on the lender and how long your maternity leave lasts. (For example, if your leave is 12 months long, you may be able to use 100% of your income, whereas if you’re on leave for 16 months, you may only be able to use 60%.)

Buying a property for rental income can also be advantageous for mortgage qualification purposes. Most lenders require an appraisal to confirm that the property is worth what you want to pay;  you can also ask the appraiser to confirm the market rent in your area. As long as the rental unit is a separate unit, the lender should allow you to use the rental income to help you qualify for a higher purchase price.

Down Payment

Lenders want to know that you have some skin in the game, too. That’s where your down payment comes into play. Your down payment represents your initial equity in the property. In Canada, if you’re buying a primary residence, you’re required to make a down payment of at least 5%. However, if you want to avoid paying mortgage default insurance, you’ll need to put down at least 20%.

Your down payment must come from your own resources – such as a savings account, investment account, RRSP or TFSA. Most lenders will also ask for a 30- to 90-day history of your account. If there are any large deposits in the account during this timeframe, the lender may ask for further details to confirm the source of those funds.

But, if you haven’t saved up enough money for a down payment, you may not be out of luck just yet. If your parents are willing to lend you a helping hand, the bank of mom and dad can come in handy. Most lenders allow you to use gifted funds toward your down payment on a primary residence. Typically, they just require a letter signed by your parents stating that they’re gifting the money to you and that it can be used toward your down payment.

Debt & Credit Score

Lenders are primarily looking to ensure you have enough income on a monthly basis to pay the mortgage, property taxes, heat and maintenance fees (if applicable) of the property. Therefore, other debt obligations aside from the property – such as personal loans, lines of credit, student loans, credit card debt and car loans – will reduce your ability to qualify for a higher mortgage. For revolving debt such as a credit card, the lender will generally use 3% of the outstanding balance for debt-servicing purposes. However, if it’s an installment loan with a fixed monthly payment, the lender will generally use the monthly payment for debt-servicing purposes. Essentially, if you have a lot of debt, you might not qualify for as high of a mortgage loan as you had hoped.

Your credit score also matters to lenders. A high credit score indicates that you’re responsible with credit, while a low credit score indicates that you may not have the best track record with credit. Credit scores tend to fall between 300 (bad) and 850 (or in above in, some cases). In general – and in order to qualify for the best mortgage rates – most lenders prefer your credit score to be above 680. Anything below that and you may have to seek out financing with an alternative or private lender, which may mean you have to pay a higher mortgage rate.


The final piece of the puzzle is the property itself. The lender wants to make sure you’re buying a rock-solid property that’s likely to go up in value and that it is free from any major defects. That’s why – even if you’re pre-approved, you might still want to include the conditions of financing in any purchase offers you make. You never know what could be wrong with the property; if something major comes up during the appraisal, the lender may not want to lend you money toward the property, which would leave you scrambling to find financing before your closing date.



This article is intended for informational purposes only and should not be deemed as legal, financial or investment advice or solicitation of any kind. Before purchasing real estate or insurance, always consult with a licensed attorney, financial advisor, insurance agent and real estate broker.


This is a guest post by Sean Cooper, the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

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