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Mar 31

How to Qualify for a Mortgage in Ontario: A Step-by-Step Guide

Author: Chris Allard

Category: First Time Home Buyers, Helpful Tips, Mortgages & Rates

Securing a mortgage is one of the most important financial decisions you’ll make, whether you’re purchasing your first home or refinancing an existing one. In Ontario, mortgage qualification depends on multiple factors, including your credit score, income stability, and down payment amount. The process can seem complex, but with the right preparation and expert guidance of Chris Allard and his team, the process can be smooth and hassle-free.

To help you get ready to qualify for a mortgage, we have prepared a detailed guide below. Let’s get started!

Understanding the Basics of Mortgages

For most Canadians, purchasing a home requires financial assistance, as paying the full property price upfront is rarely feasible. Instead, homebuyers make an initial payment, known as a down payment, and finance the remaining amount through a mortgage—a loan secured against the property. Lenders such as banks, credit unions, and private institutions offer mortgages with varying terms and conditions, impacting repayment flexibility, interest rates, and overall affordability.

Types of Mortgages in Ontario

Mortgages in Ontario come in various forms, primarily categorized based on their interest structure and repayment flexibility. Choosing the right mortgage type depends on your financial situation, risk tolerance, and long-term goals.

  • Fixed-Rate Mortgage (FRM): The interest rate remains unchanged throughout the term of the mortgage, ensuring predictable and consistent monthly payments. This stability makes it a preferred option for those who prioritize financial certainty and long-term budgeting.
  • Variable-Rate Mortgage (VRM): The interest rate fluctuates based on market conditions. If rates decrease, a larger portion of the payment is applied to the principal, reducing overall interest costs. Conversely, if rates rise, more of the payment goes toward interest, increasing the total cost of borrowing. Variable-rate mortgages are often chosen by borrowers willing to take on some risk for potential savings.
  • Adjustable-Rate Mortgage (ARM): Similar to the variable–rate mortgage, the adjustable-rate mortgage is also tied to the market’s interest rates. However, with the VRM, the payment allocation between principal and interest adjusts. Meanwhile, with ARM, the monthly mortgage payment can change entirely based on the market’s interest rates. This makes this a riskier option for potentially higher payments if interest rates rise significantly. 

Both fixed-rate and variable-rate mortgages can be open or closed:

  • Open Mortgage: Provides maximum repayment flexibility, allowing borrowers to pay off the loan in full or make additional payments at any time without penalties. This option does come with a higher mortgage rate, which makes borrowers less likely to take on this option. Yet, it’s ideal for those anticipating increased income or potential refinancing opportunities.
  • Closed Mortgage: The terms for a closed mortgage come set in stone, meaning borrowers adhere to set payment schedules for the term. The options for a closed mortgage have flexible pre-payment privileges. These include increasing regular payments or making lump-sum contributions. A closed mortgage is typically the more popular choice, as most borrowers opt for closed mortgages. However, exceeding these limits could result in financial penalties. Despite that, closed mortgages can offer lower interest rates than open mortgages, making them a strong choice for long-term homeowners.

Regardless of the type of mortgage you choose, qualifying for one requires meeting specific financial criteria set by lenders. Understanding these requirements in advance will help you select the best mortgage option and position yourself for a successful application.

Key Requirements to Qualify for a Mortgage in Ontario

While requirements to successfully qualify for a mortgage in Ontario may vary from lender to lender, they typically involve the following items.

When reviewing your mortgage application, the lender will pull your Equifax or TransUnion credit report and carefully review your credit history, including your bill payment track record and your credit score. Most “A-grade” lenders require a credit score of at least 650 to 680, even as low as 600. But you may still qualify for a mortgage with a private lender if your credit score is below the threshold.

Down Payment

To qualify for a mortgage in Ontario, you will need to put down a certain amount of money towards the purchase of your property. The minimum down payment amount will be determined by the home’s purchase price, but you are always welcome to put down more.

  • For homes under $500,000, the minimum down payment is 5%.
  • For homes valued between $500,000 and $1,499,000, the required down payment is calculated as 5% on the first $500,000 and 10% on the remaining amount.
  • For properties purchased for $1,500,000 or more, the minimum down payment is 20%.

Debt-to-Income Ratio (DTI)

The Debt-to-Income ratio, or DTI, is a key aspect of qualifying for a mortgage in Ontario. For lenders, the DTI is a quick way to evaluate your financial situation and determine whether you would be able to repay your mortgage loan. The Debt-to-Income ratio is calculated as:

DTI=(Gross Monthly Income/Total Monthly Debt​)×100%

If your DTI is 44% or above with the mortgage debt factored in, most best-rate lenders won’t approve your application.

Even if you qualify, you must still pass a mortgage stress test. Set by the Office of the Superintendent of Financial Institutions (OSFI), the test uses a rate higher than your contract rate to ensure you can afford the payments if rates go up or your income drops. 

While the stress test will reduce your overall borrowing power, it is designed to protect you and the lender from the risk of default. It acts as a margin of financial safety in case your financial situation or variable mortgage rates change significantly.

Employment and Income Verification

Typically, lenders only require a guaranteed salary with no probation to approve a mortgage application. Yet, they would still like to know three years’ employment history to gain background knowledge on the borrower. You will also need to provide proof of your income, which includes recent paystubs and a letter of employment.

For self-employed applicants, lenders require two years of personal tax returns (T1) and two years of Notices of Assessment (NOA). You may also need to provide additional documentation, such as:

  • Business financial statements
  • Your personal and business credit scores
  • Proof that your HST and GST are paid in full
  • Contracts showing expected revenue
  • Shareholder agreement
  • A copy of your Article of Incorporation or your business or GST license

Sufficient Savings

In addition to the down payment, homebuyers must budget for closing costs, typically ranging from 1.5% to 4% of the property’s purchase price. You can estimate these expenses via our online mortgage calculator. The closing costs cover:

  • Land transfer tax
  • Real estate lawyer fees
  • Title insurance
  • Fire insurance
  • Default insurance
  • Deed registration

Steps to Improve Your Chances of Qualification

To increase your chances of qualifying for a mortgage in Ontario, follow these steps:

Step 1: Reduce Existing Debt

Reducing existing debt will improve your DTI ratio and free up space in your budget for mortgage payments. Before you take out a mortgage, focus on repaying high-interest debt like credit card balances or lines of credit. If the finances permit, consider paying off your car and student loans as well.

Step 2: Improve Your Credit Health

If your credit health isn’t the greatest, don’t worry: you can boost your score within a few months by following a few simple tips:

  • Carefully review your credit history and report any errors to Equifax or Transunion.
  • Always pay your bills on time.
  • Keep your credit card usage under 30% of the card’s limit at all times.
  • Avoid closing old credit accounts and limit new credit applications.

Step 3: Save for a Larger Down Payment

With a larger down payment, you would be able to reduce your total mortgage debt and enjoy more affordable regular payments. In addition, if you put down at least 20% of your property’s purchase price, you will avoid CMHC insurance fees – a mandatory safety net protecting lenders in case the borrower defaults.

Step 4: Prepare the Necessary Documents

Finally, make sure to have all the necessary documents readily available to streamline the mortgage application and qualification process. These documents typically include:

  • Personal identification documents  (passport, driver’s license, or government ID)
  • Recent pay stubs
  • A letter of employment
  • Property sale agreement
  • Three months of bank statements showing the source of the down payment
  • Personal Notices of Assessment for the past two years

Programs and Incentives for Ontario Homebuyers

Ontario homebuyers—particularly first-time purchasers—can take advantage of several government programs and incentives designed to make homeownership more accessible and affordable.

Land Transfer Tax Rebates

The province of Ontario provides the following Land Transfer Tax Rebates to reduce the financial burden associated with purchasing a home:

  • First-Time Homebuyer Land Transfer Tax Refund, which provides qualifying first-time homebuyers with a refund of up to $4,000 of the Ontario Land Transfer Tax’

Home Buyers’ Plan (HBP) Using RRSP Funds

The Home Buyers’ Plan allows first-time homebuyers to use up to $60,000 (or $120,000 for a couple) from their Registered Retirement Savings Plan (RRSP) for the purchase of their first home. Eligible Canadians may withdraw the allowed amount from their RRSP tax-free, provided they pay back the same amount into the RRSP over 15 years.

First Home Savings Account (FHSA)

The First Home Savings Account (FHSA) is a powerful tool designed to help first-time homebuyers save for their down payment while enjoying tax advantages. Eligible Canadians can contribute up to $8,000 annually, up to a maximum of $40,000, and their contributions are tax-deductible.

Additionally, any investment growth within the FHSA and withdrawals for purchasing a first home are tax-free, making it ideal for aspiring homeowners who want to maximize their savings efficiently.

Working with Mortgage Professionals

If you are wondering how to qualify for a mortgage in Ontario, rest assured that you don’t need to memorize every step and every document needed. You can always contact the bank of your choice for more information or work with a licensed mortgage broker like Chris Allard for additional support. 

Working with a mortgage broker won’t cost you anything but will provide you with valuable guidance and peace of mind knowing that you will get the lowest rates on the market. After all, brokers work with numerous lenders, which allows them to “shop around” in search of the best rates and terms.

When meeting with your mortgage broker for the first time, be sure to ask the following questions:

  • What can I expect from the mortgage approval process? (Understanding timelines, documentation, and next steps.)
  • Can I get pre-approved for a mortgage? (Securing pre-approval helps define your budget before house hunting.)
  • Should I get a fixed- or variable-rate mortgage? (Evaluating the best interest rate structure for your financial goals.)
  • What closing costs should I budget for? (Identifying additional costs such as legal fees, land transfer taxes, and insurance.)

Common Mistakes to Avoid When Applying for a Mortgage

Throughout the entire mortgage approval process, be careful to avoid common pitfalls which can jeopardize your chances of qualifying for a mortgage in Ontario.

Applying for New Credit Before Closing

New credit applications can negatively impact your credit score, while taking on additional debt will tip your Debt-to-Income ratio in an unfavourable direction. Whether you are thinking of buying a new car, ordering new furniture, or applying for a line of credit, – hold off until after closing.

Overestimating Affordability and Skipping Mortgage Pre-Approval

Overestimating home affordability is another major mistake many homebuyers make. Remember that you will need to pass the stress test when qualifying for a mortgage, so your borrowing power will be reduced. To get an accurate idea of how expensive a home you can purchase, make sure to get a mortgage pre-approval even before you book your first showing.

Not Comparing Multiple Lenders

Different lenders offer different mortgage products, with varying interest rates and mortgage terms—and it is your (or your mortgage broker’s) responsibility to shop around and find the most appropriate option for your family. Working with a mortgage broker like Chris Allard can help you find and secure the best rates and terms on the market while making the process faster and smoother for you.

Final Steps: From Pre-Approval to Closing

Once you have a solid understanding of mortgage qualification requirements, the next step is navigating the mortgage approval and home-buying process. Below is a step-by-step breakdown of what to expect.

  1. Assess your financial situation and work on improving it if necessary.
  2. Contact a mortgage broker to understand your borrowing power and receive a mortgage pre-approval
  3. Search for homes within your budget and submit an offer to a seller.
  4. After the seller accepts your offer, your mortgage broker will shop around for the right mortgage product for you.
  5. Work with your mortgage broker to provide the required documentation to the lender. The lender may also order an appraisal to assess your home value.
  6. Your mortgage broker will submit your final application for financing and wait for approval.
  7. On the closing date, you will need to meet with a real estate lawyer, sign the final documentation, and pay the fees associated with the home purchase and loan.

Conclusion

Qualifying for a mortgage in Ontario requires careful planning, financial preparation, and a clear understanding of lender requirements. While the process involves multiple steps—from assessing your financial health to securing a mortgage and closing on your home—it doesn’t have to be overwhelming.

By working with an experienced mortgage broker, you gain access to expert guidance, competitive mortgage rates, and tailored solutions that align with your financial goals. A broker can streamline the application process, compare lenders on your behalf, and negotiate the best possible terms—all at no direct cost to you.

Whether you’re a first-time homebuyer or refinancing an existing property, taking proactive steps now will position you for long-term financial success.

Ready to start your pre-approval process? Get in touch with Chris Allard’s mortgage team for a free consultation.

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