Harder to Get Approved for a New Mortgage

Acquiring a mortgage in Canada became a little more difficult this month as two more lenders announced that they will no longer continue their mortgage lending services in Canada.

Wells Fargo, which proved to be a solid alternative for homeowners with less-than-stellar credit, followed in the footsteps of a slew of other US-based alternative lenders by announcing that it was pulling out of the Canadian market.

While GE Money and Accredited Home Lenders pulled out at the brink of the US economic meltdown at the end of last year, Wells Fargo's Canadian business remained strong. But the company's poor performance in the US made it impossible for it to continue lending north of the border.

To add to the sting, Citizens Bank—a subsidiary of Vancity Credit Union—recently announced that it will be halting its mortgage lending business. Citizens Bank sold its mortgage-based book of business to TD Canada Trust.

Less choice

The slimmer selection of viable mortgage options is making it tough on consumers—including those with reasonably good credit. Most affected are those with credit scores below 680 (although this number can be a little lower if you're putting down a 10% down payment or higher), the self employed, and those that are putting down less than a 20% down payment.

Homeowners who put down less than 20% must obtain mortgage default insurance from providers like Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, or AIG United Guaranty. The poor economic climate has resulted in a higher chance of mortgage defaults, so the insurers have become more selective in who they insure. In many cases, they've increased their requirements and are asking for engineering reports, appraisals, and income-related documentation that they never asked for before. 

How to qualify

The best thing Canadian homeowners can do to ensure they qualify for a mortgage is to request a preapproval from a mortgage broker before they start looking for a home. In this situation, a mortgage broker will pull your credit report, collect your financial information, and determine whether you have what it takes to qualify with the available lenders out there.

If you're self-employed, you'll need to prove your previous two years' worth of income. If you're starting a new job, your three-month probationary period must be complete if you hope to qualify for mortgage default insurance. And—of course—the higher your credit score, the better. If you're sitting around 640 or lower, you might want to take some steps to boost it before hunting for your new home.

There's still hope

In the end, if your credit score is reasonable, you make a decent income (that you can prove), and you're not spending to the maximum of your pre-approved amount, you should be okay. It also helps if you're not in a lot of debt (primarily credit card debt).

While the mortgage lending situation may be tough for a while, there is a light at the end of the tunnel. Real estate is the main factor leading Canada's economic recovery. It would be counterintuitive for the mortgage industry to bring it to a halt through drastically decreased mortgage approvals.

For more tips, see 5 Steps to Get a Good Mortgage Now