There are a number of items that a lender looks for when approving a mortgage.  but I am going to explain the 3 major factors lenders are looking  for.  Most Mortgage Brokers/Agents can arrange a mortgage when you meet 2 of the 3 requirements.  Most banks would like all three conditions met.

1. Your credit history: There are 3 credit bureaus, Equifax, Experian and TransUnion. Some lenders subscribe to all some to just one.  Your information is collected and combined to create a credit score or “FICO” (Fair, Isaac & Company developers of the system).  The information is collected on a monthly basis. What is on your credit rating is the original amounts of a loan or the high credit of a revolving credit facility your outstanding balance and your monthly payments, if you are up to date or pass due. Presence of adverse public records (bankruptcy, judgements, suites, liens, wage attachment etc.) This information remains on the credit bureau for 6 years from date of last activity on the account This is the proportions that are used to create the credit score  score 35% is your payment history, 15% is length of credit history,10% new credit, 10% is the type of credit used and 30% is the mount owing.  The number of credit inquires in an allotted period of time also affect this score. This scoring ranges from 300 to 900, the higher the better.  The majority of people score in the 700 range. You can obtain your rating via the web or phone for a cost and everyone should do so annually. Lenders view these scores differently and apply them differently to their rates. Where one lender rates 600 as AAA another lender may require 680 plus to be AAA.     Should your credit score be low you will need proof of solid income and good down payment from your own resources or good equity in your home  to obtain a mortgage. This maybe a private mortgage.

2. Your ability to repay the mortgage loan:  This takes into account your employment and income. There are 2 important ratios in this case. The first being your GDS or Gross Debt Service Ratio, this is your housing costs (principal, interest, tax, heat and a percentage of condo fees where applicable) as a percentage of your Gross Annual income.  Most lenders are looking for this to be 32% range.  The second being your TDS or total debt service ratio. This is your housing costs plus all outside debt (loan payment, charge card payments, child support etc) most lenders are looking for this to be in 40% range.  When looking at employment you must be past a probationary period of work. You need to provide proof of income via employment letter, Tax notice of assessment and or pay stub. If you are self employed and can not provide proof of income you can still get a mortgage with 10% down from your own resources, proof no income tax is outstanding and a good credit history, minimum credit scores apply here but vary from lender to lender.

3. Your down payment:   Mortgages with 20% down payment are conventional mortgages and do not require default insurance as required by the bank act. (there maybe exceptions to this due the age of the property, location etc) Less than 20% down requires default insurance, CMHC or Genworth . These companies guarantee the lender against default by the borrower and the borrower is charged a premium for this. This premium is based on a percentage of the mortgage and depends on percentage down and amortization.  Down payments can be borrowed or gifted.  There are a few lenders that do  0% down mortgages with excellent credit rating, strong ability to repay. Borrowers also need to show proof of closing costs which is usually is 1.5% of the mortgage amount.. This covers the cost of land transfer tax and legal fees.

Understanding these 3 requirements will help you considerably when you are talking to your mortgage lender.

Changes as they affect mortgages are to take place shortly. The federal Budget for 2011 made 3 major changes with New Canadian Mortgages Rules. These are as follows:

1. The maximum amortization period for purchases or refinances with less than 20% equity is reduced to 30 years.  This will increase mortgage payments but lesson the amount of interest that is paid in the long run.  For example a $100,000 mortgage at 4% rate will cost $34.72 a month more. If you remember in 1999 CMHC would only insure mortgages for a maximum of 25 years and interest rates had been considerably higher.  In 2005 the amortization went to 30 years, in 2006 went to 35 years, in 2007 to 40 years with zero down payment. . Today’s government is concerned over the debt load of Canadians causing the government to cut back on amortizations. In 2006 it was cut back to 35 years.  The most important thing to remember is this is only for people who have less than 20% equity in their purchase.  This new change to 30% amortization will come into force March 18, 2011.
   
   
2. The maximum amount that can be borrowed when refinancing a mortgage is reduced to 85% from its current 90%. This reduction will force Canadian’s to keep more equity in their homes and the government hopes will encourage savings.  This refinance includes increasing your mortgage with your existing lender.  A renewal will not be affected by this unless you change lenders or increase your mortgage. The lender looks at the value of the property as of the date of refinance not when the mortgage was first established. This change will also take affect March 18, 2011.
   
   
3. The government will withdraw its insurance backed home equity lines of credit; this is on non-amortized lines of Credit secured by your home.  This means that CMHC will no long insure Home Equity loans that exceed 80% loan to value of the property. Secured lines of credit will still be available but on a lessor loan to value basis.  The amount that a lender will lend against the value of the home on a home equity line of credit may vary from lender to lender.  The reason for this change is the government has determined that the home equity loan debt has risen in recent years resulting in more consumer debt and definitely more loan defaults. This change will take effect April 18th 2011.