If you’re planning to buy a home, you’ll probably need to get a mortgage. Comparing mortgage rates is a good first step, but applying and getting approved for a mortgage is the most important part of the process. While it may seem difficult and daunting, with the right preparation, getting a mortgage approval can be a relatively smooth process. 

There are a lot of factors that can affect your mortgage approval and the final amount you’ll be allowed to borrow. While there aren’t any shortcuts to getting a guaranteed mortgage approval, these five tips below can increase your chances of getting your mortgage approved.

1. Check (and improve) your credit score

Your credit score is a number between 300 and 900 that indicates your overall credit-worthiness. Whenever you make a late payment, apply for credit, or default on a loan, credit reporting agencies will note it on your credit history and lower your credit score. A higher score shows that you’ve been committed to making loan repayments in the past and are therefore less likely to default. This indicates to mortgage lenders that you’re more likely to pay back your loan on time and makes them more willing to lend you money.

Here are the typical ranges for credit scores in Canada:

• Below 599: Poor credit
• 600 to 679: Fair credit
• Above 680: Very good credit

If you have poor credit, mortgage lenders will assume that you’re less likely to make repayments on time, which makes lending to you riskier. Most major banks won’t take that risk and thus, won’t approve you for a mortgage if your credit score is under 600. Instead, you may need to use a “B lender” or even a private lender, which will charge you a higher mortgage rate to compensate for the extra risk.

In order to have access to better mortgage lenders and lower rates, you should try to improve your credit score before you apply for a mortgage. Here are a few steps you can take:

• Check your credit score, so you can measure your progress. There are online tools that will let you do this for free.
• Pay your bills on time and in full, especially for credit cards and loans.
• Try to use less than 30% of your overall credit limit.
• Don’t apply for more credit than you need. Lots of applications for credit can hurt your credit score.
• Keep your oldest credit card active, even if you don’t use it. Having a long credit history is good for your credit score.

2. Pay down your existing debt

Lenders will look at your debt-to-income ratio when deciding whether to lend to you. They’ll want to know that your income can cover your mortgage payments, even after paying off your existing debt. That means existing debt can impact how much you’re able to borrow.

The first part of this ratio is your income, which you’ll want to keep as high and as stable as possible. Being in a full-time job for a long time is ideal. Aside from increasing your income, paying off your existing debt is the best way to maximize your mortgage affordability. This includes car loans, student loans, credit cards, and any other credit line with regular payments. By paying as much of your debt off as you can, you’ll have a higher income-to-debt ratio when you apply for a mortgage.

More detail on debt ratios: Your mortgage provider will use two different kinds of debt ratios to determine how much you can afford to borrow, your Gross Debt Service Ratio (GDS) and your Total Debt Service Ratio (TDS). The general guideline from the Canada Mortgage and Housing Corporation (CMHC) is to have a GDS of less than 35 per cent and a TDS of less than 42 per cent. Your GDS is the percentage of your monthly income that pays for your housing costs under your new mortgage. Your TDS is similar to your GDS in that it factors in your housing costs, but it also includes your other debts such as car payments and credit card loans.

The takeaway is that with a higher income and lower existing debt you’ll be able to apply for a larger mortgage. If you can’t easily increase your income, then paying off as much of your existing debt as possible will help improve your debt service ratio.