Tools

Mortgage qualifier tool

Last updated: January 18, 2022

What this tool is all about:

This tool evaluates your ability to afford your target property and then gives you some insight into your purchasing power. Be sure to include monthly debt payments and gross annual income for both you AND your co-applicant (if you have one).

Disclaimer: Results are not equivalent to a pre-approval and actual approval is subject to lender specific limits which may differ from what is calculated below. This calculation is meant to be an approximation and Perch recommends you create a profile to get a more accurate result and then confirm any pre-approvals with our mortgage professionals prior to purchasing a property. Please refer to our Terms of Use for more information.

When shopping for a mortgage, your credit score will play a part in determining how much mortgage you can afford. It’s one of the many factors lenders will look at when deciding whether or not you are a good candidate for a loan and also shows the level of risk when it comes to lending you money. Generally the better the credit score, the lower the rates you can secure. However, there are different mortgage options you can opt for such as uninsurable or insurable, each requiring a minimum down payment amount and each providing different mortgage rates. Which one you qualify for will depend on your credit score.

As a rule of thumb, here are the credit score thresholds you want to meet:

  • To qualify for a high ratio mortgage (less than 20% down) or a prime mortgage lender, you should aim to have a credit score of at least 620
  • If you’re under 620, you will likely need at least 20% down payment and would be working with an alternative or private lender. These usually come with much higher rates (1.50% to 12.00% higher than prime mortgage lenders)

Lenders will also check if you have a low debt-to-income (DTI) ratio, which divides the total of all monthly debt payments by monthly gross income, as they want to make sure you will be able to repay a loan. If you have a high DTI, this might show lenders that you will have difficulties making your payments. If you are wondering ‘how much mortgage will I qualify for?’, use the Perch mortgage qualifier calculator to gain insight into your purchasing power.

 

To learn more about your credit score and how it affects your purchasing power, read here.

In Canada, you can get your credit score through two credit reporting agencies: Equifax or TransUnion. Credit scores range from 300 to 900, and the average credit score is around 650. Companies that lend money or issue credit cards, such as banks and retailers, send your payment history and loan balance details to these credit reporting agencies. This forms the basis of your credit history.Having a low credit score can show that you are a risk to potential lenders and might result in a higher mortgage rate. You can request one free copy of your credit report annually from either credit reporting agency or pay a small amount to get your credit score any time. Your credit score is calculated by an algorithm made up of the 5 things below (source: Equifax).
  1. Your payment history (35%)
This is your track record in making payments on time, and demonstrates to the lender your ability to manage a single or multiple credit accounts. This includes things like any late payments, how quickly they were corrected and how long ago this occurred.
  1. Your average credit utilization (30%)
This refers to the percentage of your total credit available that you are using. For example, if you have a $10,000 credit card with a $3,000 balance, you would be at 30% credit utilization.
  1. The length of your credit history (15%)
This refers to how long you’ve had credit for. Generally, lenders want to see at least 2 years.
  1. Public records (10%)
This includes things such as bankruptcies, consumer proposals, items sent to debt collections, etc.
  1. Number of credit inquiries (10%)
Only “hard pulls” on your credit score are factored into this, which are usually done by credit providers once an application is made. Note: It’s mandatory for mortgage professionals to pull your credit score in order to submit your mortgage application.

Although your credit score is crucial in the home buying process, it is not the only factor that matters. If anything, the most important thing is just having the minimum required since it determines if you can get financing or not. Someone with a 700 credit score or someone with an 850 credit score likely would end up with the exact same mortgage rate. Lenders will also look at your income, debt levels, equity in property and at the actual property you intend to buy.

Here is a list of things you can do to try and improve your credit score, keep in mind that nothing is instantaneous. These suggestions are just a rule of thumb and not hard and fast rules that should never be broken. Aside from credit card products, any type of credit product where you are borrowing money, even for a short period of time will count towards your credit score. Click here to learn more about the different types of products that could impact your credit score.
  1. Always pay at least the minimum payment on any credit card bills, and make sure they are paid on time. If you know that you won’t be able to make a payment on time, let your lender know as soon as possible as they can possibly extend the due date. It’s important to make sure you receive your monthly account statement first, before you make the payment. If you make a purchase on your credit card and pay it off immediately, it doesn’t get reported to the credit bureau.
  1. Do not use more than 35% of your total available credit. So if you have a $10,000 credit limit, do not use more than $3,500. The easiest way to lower your utilization is to increase your credit limits, but you’ll need to ensure you have the discipline to not overspend with the higher limits. Remember, this is just a general rule of thumb and not a rule that can “never” be broken.
  1. You can help improve your credit score by having multiple credit lines or products (they don’t have to only be credit cards). This could be two credit cards, or a credit card and a line of credit, a cell phone contract, etc. However, be sure to fully pay off the balance each month. A “thin” credit file, meaning you only have one credit product can actually give you a lower score.
  1. Establish a long credit history as it can give you a better credit rating. Keep your older cards active by using them once in a while to ensure they don’t close due to inactivity. If you can demonstrate a consistent history of paying back multiple loans over a long period of time, you’re far less likely to default on them!
  1. Avoid applying for multiple credit products frequently in a short period of time, as it can look bad to lenders who may wonder why you need so many loans.

When it comes to your income for your mortgage application, there are three things lenders will look at to check your mortgage eligibility. They will look at consistency of income, how long you have been receiving the income, and the likelihood that income will continue. There are different types of income that lenders will look at for your mortgage application as well, and you should always confirm your qualifying income with a mortgage advisor.

Employment income

Lenders will look at tax slips and/or pay stubs to verify your income. You may be able to include overtime, bonuses and commissions as well.

Employment income will vary based on if you’re salaried or self-employed and can vary by lender.

Pension income

You can use your Canada Pension Plan (CPP) payments and RRSP as a part of your monthly income if you are applying for a mortgage in your retirement.

Rental income

If you make an income from renting out part of your home, you can include part of this. You must also show official proof of your rental income through a lease or your T1 tax filing.

Child support and alimony income

If you are receiving support from a settlement or child support, this can be considered a part of your monthly income. In order for lenders to see that you won’t struggle with future mortgage payments, you must show that the payments will continue for as long as your mortgage term and show that you have been receiving the payments on a consistent basis for a minimum of six months.

Investment income

If you have investments, you can use interest payments and dividends to help you qualify for your loan as per your T1 tax filing. Lenders will average out the payments you have received in the last two years to help you qualify for your loan.

Your intention for the home and the property type can also affect your mortgage rate.

If you intend for the property to be your primary home, you must show that you intend to live in it for most of the year. These types of homes often qualify for a lower mortgage rate and down payment. If the property is going to be a secondary home, where you will live in it for part of the year, the property could still have a lower interest rate but might require a larger down payment. If the property is an investment property, where you plan to rent it out, it will most likely have a higher interest rate and down payment compared to a primary or secondary home.

Lenders will also look at the type of property you are intending to buy which can affect how much of a mortgage you qualify for. Factors such as location, age of the property, overall state of the property and more can also affect the lender’s decision. The main types of homes you can buy are:
  • Single family home
  • Condominium/apartment
  • Townhouse
  • Multi-unit (duplex, triplex, etc.)

A co-applicant is an additional person who is considered in the underwriting and approval of a loan or application. Co-applicants can improve the chances of loan approval or even get you better loan terms, since it involves additional sources of income, credit and assets. It is not the same as a co-signer or guarantor, as a co-applicant will have more rights and responsibilities.

A credit application for both borrowers will be reviewed by an underwriter, where the credit scores and profiles of both borrowers will be considered. More favourable lending terms are usually established based on the credit information from the higher quality borrower. Often borrowers with higher credit can help those who are having difficulty getting financial approval or even lower the interest rate on a loan for those with average credit. It can also allow you to afford a higher value home if you apply with a co-applicant as it can increase the principal amount received from a loan.

Co-ownership type

Many people decide to co-own a home as joint tenants or tenants-in-common. It’s important to establish the co-ownership type before buying. If one of the owners in a joint tenant agreement dies, the other owner will receive the shares of the home. In a tenants-in-common arrangement, each tenant owns a portion of the property which becomes a part of their estate when they die. Buying with a co-applicant is a very important decision and you must be sure you trust the other buyer to make payments on time, as everyone’s credit score on the mortgage will be negatively impacted if they fail to do so.

Agree on the details

Before signing, all details and agreements should be clear to everyone. Ensure all expectations and contractual arrangements between parties are discussed, such as what would happen in the scenario that one would want to sell. It is also wise to specify the percentage each person owns of the property if it is not being split equally.

Since there are risks associated with being a co-applicant, it’s important to consider if it’s in their best interest. Here are some things to consider before agreeing to become a co-applicant:

  • Mortgage payments will be visible in the co-applicant’s credit report. This can impact any future mortgage applications on other properties, which could result in them not receiving the loan or financing needed if they choose to buy another property in future.
  • If you cannot make payments and your co-applicant can’t make up for your short fall, both you and your co-applicant will be impacted as you are both legally responsible for any missed payments
  • If your co-applicant has never purchased a home before, they would lose their ability to participate in specific first-time home buyer programs for any future purchases, which could result in them having to pay higher closing costs. This is because being a first-time home buyer is based on never having owned any property and as a co-applicant you are deemed to be a co-owned in the property.
  • If the property is sold and you aren’t living in the home, your portion of the sale may be subject to capital gains.

To learn more about how co-applicants can affect how much home you can afford, read here.

Check your mortgage eligibility by using our mortgage qualifier calculator or speak to a Perch mortgage advisor today. You can also take a look at Perch’s Guide to Buying a Home to get tips and resources to help you in your home buying process.