Lenders pay close attention to credit score when deciding whether or not to approve a mortgage application. Generally speaking, having a higher credit score improves your likelihood of securing a mortgage and a more favourable interest rate. Credit score may also impact the total mortgage amount that a lender is willing to let you borrow.

The minimum credit score needed to get a mortgage can vary depending on your lender, mortgage type and other aspects of your financial profile. That said, let’s dig into credit score requirements for a mortgage.

What Credit Score Do You Need For A Mortgage?

Your choice of a mortgage will usually fall into two categories: prime or alternative. Minimum credit score requirements can differ between the two.

Credit Score For Prime Mortgages

In general, prospective borrowers will need a credit score of 650 or higher to qualify for a prime mortgage. Prime lenders (also called A lenders) include Canada’s larger banks like Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD) and Bank of Montreal (BMO). Some provincially regulated credit unions also classify as prime lenders.

Credit Score For Alternative Mortgages

By contrast, borrowers may qualify for an alternative, or B mortgage, with a credit score as low as 500. You can often find these types of deals through private lenders, monoline lenders, trust companies and investment corporations.

Prospective homeowners can reach out to individual lending institutions for more information related to credit score requirements. To streamline the research process, they may choose to work with a mortgage broker, like Rocket Mortgage Canada, UL (Rocket Mortgage™). Brokers can present borrowers with a variety of potential lenders and lending options, including prime and alternative mortgages.

How Your Credit Score Affects Your Mortgage Rates

Your credit score has a direct impact on the interest rates you may be offered when you approach a lender for a mortgage.

These scores give lenders a clear picture as to what kind of borrower you are and how you manage your finances. In turn, this helps the lender determine what level of risk you are as a borrower and if they’ll need to increase their rates to compensate for that risk.

In general, mortgage lenders will offer lower interest rates to borrowers with higher credit scores. 

What Is A Good Credit Score For A Mortgage?

In Canada, your credit score is graded on a “poor” to “excellent” scale based on the number range it falls under. The higher your score falls on this scale, the more mortgage options you may qualify for. 

Here are the typical credit score ranges and how mortgage lenders might see them:

  • 760+ (Excellent): You’re likely to repay your mortgage on time and qualify for the best rates and terms a lender can offer.
  • 725 – 759 (Very good): Similarly to those with excellent credit scores, you’ll likely have access to some of the better rates and terms.
  • 660 – 724 (Good): A “good” credit score will qualify you for most mortgage options and favourable interest rates, though you may have fewer options than if your score was very good or excellent.
  • 600 – 659 (Fair): You may still qualify for a mortgage, but at less favourable rates and terms than those with higher credit scores. Most lenders’ minimum required credit scores rest in the “fair” range.
  • 300 – 599 (Poor): Applicants with “poor” credit scores will be viewed as high-risk and likely to miss payments. If a borrower with poor credit is approved for a mortgage, they’ll pay higher interest rates.

Factors Affecting Your Credit Score

Your credit score is calculated by Canada’s two main credit bureaus (Equifax® and Transunion®) using five main factors, each making up a different percentage of your overall score. They are:

  • Payment history (35%): The largest factor in your overall credit score is how often you make on-time debt payments. Missed or late payments can negatively affect your credit score.
  • Amounts owed (30%): This measures how much you owe on various debts, like credit cards, against your available credit. Your amounts owed also account for how much available credit you’ve used on a particular account.
  • Length of credit history (15%): The ages of your oldest and newest credit accounts, as well as the average age of all your active accounts, factor into your credit score. Lenders like to see that borrowers have established credit accounts and experience managing debt. 
  • Credit mix or public records (10%): Lenders also like to see that you have a healthy mix made up of revolving credit (credit cards and lines of credit) and installment debt (mortgages, personal loans or student loans). Equifax® might consider public records of bankruptcies or defaulted loans over your credit mix.
  • New credit (10%): Any new debts you apply for are factored into your credit score. If a lender made an inquiry into your credit report recently, your credit score could be affected.

What Else Do Lenders Look At To Approve A Mortgage?

Mortgage lenders are interested in more than just your credit score. You can also expect them to look at:

  • Debt service ratio (DSR): Also known as your debt-to-income ratio, your DSR measures your gross and total debt service (GDS and TDS, respectively). Most prime lenders require that your GDS not exceed 39% and your TDS not go above 44%. Alternative lenders typically accept a maximum of 50% for both GDS and TDS, though some will consider applications with higher ratios.
  • Debt management: Even if you have a strong credit score, your credit history might show unfavourable marks or trends. Lenders might question how well you handle your debts if they see too many blemishes in your payment history.
  • Employment records: Lenders want to know you’ll have reliable income to afford your monthly payments. There may be special considerations for borrowers who are self-employed or get paid on an hourly basis.
  • Your desired mortgage amount: The amount you’re trying to borrow can have an effect on your mortgage approval, as well as your rates and terms. Because of the risk of lending out higher mortgage amounts, lenders may hold borrowers to stricter credit requirements if they’re applying for larger amounts. 
  • Monthly housing costs: Lenders will also consider the home you want to buy with the mortgage and the additional costs associated with it. These can include potential property taxes, utility bills, condo fees and other expenses.
  • Stress test: Using the mortgage stress test, lenders will calculate whether they would still approve you at an interest rate of either 5.25% or your potential rate plus 2% (whichever is higher). This ensures you can still afford your payments if interest rates rise.

Tips For Applying For A Mortgage With Bad Credit

Having a low credit score can limit your ability to get a mortgage. Other than taking steps to improve your credit score, there are a few different ways you could boost your chances of mortgage approval.

Consider Alternative Lenders

Alternative lenders, sometimes called B lenders, may approve borrowers with lower credit scores or those who struggle to qualify for a prime mortgage for other reasons. 

The tradeoff is that alternative lenders will often charge higher interest rates and require larger down payments than you’d get from a prime mortgage. In fact, the minimum down payment for an alternative lender mortgage is 20%. This is to offset the risk of approving borrowers with lower credit scores or other indications of financial difficulties.

Make A Larger Down Payment

If you have the funds to do so, making a larger down payment than your lender requires can show you have the financial resources to afford a mortgage. This will also help you reduce your monthly mortgage payments, which will make them more manageable in the long-run.

Look Into A Co-Signed Mortgage

You could have a friend or family member with good credit sign onto the mortgage application as a co-borrower. Lenders will factor in the co-borrower’s credit score and income when determining your eligibility. Approved co-signed mortgages will become the responsibility of the co-borrower if the primary borrower misses their payments.

The Bottom Line

Your credit score plays a major role when you apply for a mortgage. Lenders use your score to determine how well you’ve managed your debts and finances, as well as your ability to repay a mortgage. Your interest rates and approved mortgage amount will often reflect the strength of your credit score. Take time to build up your credit score if it’s too low for the mortgage you need.

If your credit score is mortgage ready, start an application today with Rocket Mortgage™.