What Lenders Look at When Approving a Mortgage

You see your financial life one way. You know you pay your bills, you have a steady job, and you are responsible with money. But when you apply for a mortgage, the lender sees something different. They see numbers, ratios, and risk factors. Understanding how lenders view your application helps you prepare better and avoid disappointment.

Canadian mortgage approval follows a framework known as the Five C’s of Credit: Character, Capacity, Capital, Collateral, and Conditions. Each C represents a different angle from which lenders evaluate your application. Let us walk through what they actually look at and what you can do to strengthen your position.

Character: Your Track Record

Character is about your history with debt. Do you pay bills on time? Have you defaulted before? Do you have a pattern of responsible credit use?

The primary tool for assessing character is your credit report. Lenders look at:

• Credit score: Most prime lenders want 620 to 680 minimum. The best rates typically require 720 or higher. Your score reflects payment history, credit utilization, length of credit history, and types of credit used.
• Payment history: Late payments, collections, and defaults stay on your report for six to seven years. Recent problems hurt more than old ones.
• Credit utilization: Using less than 30% of your available credit helps your score. Maxed out cards signal financial stress.
• Public records: Bankruptcies, consumer proposals, and judgments are red flags that require explanation and time to recover from.

Before applying, pull your own credit report from Equifax or TransUnion. Check for errors. Dispute anything incorrect. Pay down credit cards to below 30% utilization. These steps can boost your score within weeks.

Capacity: Can You Afford It

Capacity is about your ability to make payments. Lenders calculate this using two key ratios.

Gross Debt Service (GDS): Your housing costs divided by gross income. Housing costs include mortgage principal and interest, property taxes, heating, and half of condo fees if applicable. Lenders typically cap GDS at 32% to 39% depending on your credit score and down payment.

Here is an example. You earn $100,000 per year ($8,333 per month). Your proposed mortgage payment is $2,500, property taxes are $400, and heating is $100. Total housing costs: $3,000. GDS: $3,000 divided by $8,333 equals 36%. This is within most lender limits.

Total Debt Service (TDS): Your total debt obligations divided by gross income. This includes housing costs plus all other debt payments: car loans, credit cards, student loans, lines of credit. Lenders cap TDS at 40% to 44%.

Continuing the example: Add a $400 car payment and $200 in credit card minimums. Total debt obligations: $3,600. TDS: $3,600 divided by $8,333 equals 43%. This is at the upper limit but still acceptable for many lenders.

To improve capacity ratios, pay down consumer debt before applying. Every $100 in monthly debt payments reduces your mortgage qualification by roughly $15,000 to $20,000.

Capital: Your Skin in the Game

Capital is about your down payment and savings. Lenders want to see that you have your own money invested in the property.

Minimum down payments in Canada:

• 5% on the first $500,000 of purchase price
• 10% on amounts between $500,000 and $999,999
• 20% minimum on properties $1 million and up

But lenders look beyond the minimum. They want to see:

• Source of down payment: Savings are best. Gifts from family are acceptable with a gift letter. Borrowed down payments are generally not allowed for insured mortgages.
• Closing costs: You need 1.5% to 3% of purchase price for legal fees, inspections, and adjustments, separate from your down payment.
• Emergency savings: Lenders like to see you have reserves beyond the down payment. This varies by lender but having three to six months of expenses helps.

Larger down payments reduce lender risk and can unlock better rates. At 20% down, you avoid mortgage insurance premiums. At 35% or more, some lenders offer their best rates.

Collateral: The Property Itself

Collateral is the security for the loan. If you stop paying, the lender wants to know they can sell the property and recover their money.

Lenders evaluate collateral through:

• Appraisal: An independent appraiser assesses the property value. The lender uses the lower of appraised value or purchase price to calculate your loan-to-value ratio.
• Property type: Standard detached homes are easiest to finance. Condos, especially in buildings with commercial components or high investor ratios, face stricter requirements. Rural properties may require larger down payments.
• Location: Properties in major markets are generally easier to finance than remote or declining areas. Lenders have geographic risk preferences.
• Condition: Properties in poor condition or with major defects may require repairs before financing is approved.

For Fraser Valley properties, most locations are well-accepted by lenders. Mission, Abbotsford, and Chilliwack are all considered standard markets. Rural acreages may require 25% or more down depending on the lender.

Conditions: The Broader Context

Conditions are external factors that affect lending decisions.

Employment stability: Lenders prefer permanent full-time employment. Contract, self-employment, and probationary periods require additional documentation and may limit your options.

Income type: Salaried income is straightforward. Commission, bonus, and self-employment income typically requires two years of history to average.

Economic environment: In uncertain times, lenders tighten criteria. During strong markets, they may relax some requirements to compete for business.

Regulatory requirements: Federal mortgage rules set minimum standards that all lenders must follow, including the stress test and maximum amortization periods.

Putting It All Together

No single factor determines your approval. A strong credit score can compensate for a smaller down payment. A larger down payment can offset higher debt ratios. Stable employment can reassure lenders even if your credit history is short.

The key is understanding what lenders see and presenting your application in the strongest possible light. Check your credit. Pay down debt. Save for a solid down payment. Gather your documentation. Choose a property that fits lender guidelines.

Working with a mortgage broker helps because they understand how different lenders weight these factors. What one lender declines, another might approve. A broker matches your specific profile to the right lender.

Ready to see what you qualify for? Get pre-approved to understand your borrowing power. Learn more in our mortgage basics section or contact Browne Mortgage to discuss your situation.