How does a mortgage application get approved?

After submitting your application, it works its way through the underwriting loan process. Here, we will make sure your financial profile matches certain guidelines and loan criteria. Then, a decision will be made to approve your mortgage application.

How does a lender underwrite a mortgage application?

An underwriter’s main task is to assess the borrower’s risk. To assess this, mortgage underwriters follow a set of guidelines to analyze several aspects of the mortgage and provide recommendations if there are risks involved.

Due to the nature of different mortgage loans, there are several methods and factors considered in the underwriting process of different properties types including Residential, Commercial, and Construction mortgages.

The general guidelines used to underwrite a mortgage application include:

1) Down Payment and Equity

The portion of the home price that is not financed by the mortgage loan
From the lender’s point of view, the bigger the down payment or equity amount, the higher the chance of getting a mortgage application approved

2) Credit History (or Credit)

Credit is essentially your reputation as a borrower
The lender obtains this information from credit reports, which shows your borrowing history

3) Income

Lenders may look at different kinds and sources of income to determine if the borrower has enough money to fulfill their current obligations as well as their new mortgage
Lenders may look at sources of income including employment income, self-employment income, rental income, overseas income, or other types of income

4) Property (Collateral)

Lenders will review the type of property you want to purchase
Lenders will look at the Loan to Value (LTV) ration and assess any problems with the property (for example, the “Leaky Condo” problem in BC)

By looking at and analyzing the above factors and guidelines, lenders decide whether or not to approve a mortgage application.

As your mortgage broker, we have extensive knowledge of all criteria. By sending your application to the right lender, you can get the best mortgage in terms of rate, amount, term, and amortization.

To find out about different mortgage products/programs please click here. You can easily start an application with us and we will get back to you within the same business day.

Different Types of Underwriting Processes

While most guidelines for different types of mortgage underwritings are similar, there are different methods and factors involved in the underwriting process of Residential, Commercial and Construction mortgages.

1) Residential Mortgages

To approve a residential mortgage, lenders set up certain guidelines to determine mortgage applications. Down payment or equity, credit, income, and property are all important to issue a mortgage commitment letter. However, due to the special circumstances, there may sometimes be exceptions.

For example in some cases, if a borrower has a strong net worth and is a new immigrant to Canada, lenders may wave some requirements or create special guidelines to approve the mortgage application.

2) Commercial Mortgages

Purchasing of a commercial property is much more complicated than a residential one, so you can expect the mortgage underwriting process to also be a little bit more complicated.

Instead of looking at a borrower’s income, commercial mortgage lenders require a minimum debt service coverage ratio. This is used to analyze how large of a commercial loan can be supported by the cash flow generation for the property, or to determine the income coverage there is at a certain loan amount.

The debt service coverage ratio will be used in addition to down payment or equity, credit, and property when lenders examine a commercial mortgage application.

3) Construction Mortgages

Construction mortgages are usually short-term loans used to pay for the cost of building a home. They are much more difficult than your typical home purchase because of the inherit risks associated with lending on a home that during the construction, is significantly less marketable than your average home.

Funds are taken from the loan through a process referred to as a “draw”. A draw is the way funds are taken from the construction budget to pay material suppliers and contractors. Each lender has different requirements for processing a draw. In most cases, each draw is advanced based on the remaining cost to complete of the projects. Once all the draws have been paid out and the home is built, the buyer then needs to get the end loan in order to pay off the construction loan.

Some requirements for processing a Construction Mortgage include:

A qualifier builder must be involved
The lender needs detailed specifications (floor plans, materials, etc.)
The home should be estimated by an appraiser (value, specifications, etc.)
A large down payment must be put down