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To put it simply, a credit score of 680+ is required to qualify for the best mortgage rates in Canada in 2022. But trust us, there’s a lot more to know about credit scores and how they affect your mortgage rates and options. Nearly half of all Canadians (47%) don’t even know where to check their credit scores! Whether you’re getting your updated credit score sent to you every month, or you’re not even sure what your score is, there’s a lot to learn about what they are and how they’ll affect your mortgage experience.
What Credit Score Is Needed To Buy A House?
As housing prices continue to rise in Canada, getting approved for a mortgage can be a serious challenge. As of early 2022, the minimum credit score required to be approved for a mortgage is anywhere from 620 – 680 at the lowest. Do keep in mind that the credit score required to be approved for a mortgage does rely on other factors related to the borrower as well. For example, if you have a high level of income and low debt, you may be able to get away with a slightly lower credit score than other borrowers at the opposite end of the spectrum.
Why Does My Credit Score Matter When Buying A House?
Your credit score is a fast pass to great mortgage rates and excellent terms. It’s essentially proof that you can be trusted to make payments if you’re given a loan of any kind. A high credit score means you’ll unlock access to the best mortgage rates on the market and have more flexibility when it comes to the terms and conditions associated with a mortgage. It also means you could save upward of six figures worth of interest over the course of your lifetime!
Since credit scores have become an integral part of our financial lives, it’s more important than ever to keep track of yours and understand how your actions affect the numbers.
Do Credit Scores Affect Mortgage Rates?
Your credit score has a direct impact on the rates you’ll be able to access 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.
What Is A Good Credit Score In Canada?
The higher your credit score is, the greater your chance of being approved for a mortgage or other loans/credit products. So, once you’re able to check your credit score, you’ll need to determine where you fall on the scale. In Canada, credit scores range between 300 – 900. You’ll find very few people on the extreme ends of the spectrum as most Canadians’ credit scores would likely fall between 600 – 800. Credit scores are set up in a range and the breakdown of each level is as follows:
– A score of 800 or above is considered excellent
– A score between 720 – 799 is considered very good
– Between 650 – 719 is considered good
– 600 – 649 is considered fair
– Anything under 600 is considered a poor credit score
What Do Lenders Look For When Home Buyers Apply For Mortgages?
When lenders look at your application for a mortgage, they’ll be interested in more than just your credit score. They’ll want to see how you manage your debt and what your payment history looks like as well. This means they’ll be pulling a copy of your credit report, so even if you meet the minimum credit score requirement, red flags in this report could be the deciding factor as to whether or not you receive the loan. In order to be properly prepared for your mortgage application process, you should know what items lenders will be looking for when you apply. You can expect them to look at:
– Your income
– Your employment record
– Your general expenses
– The amount you’re planning to borrow
– Your current debts
– The amortization period
– Monthly housing costs associated with your new home (mortgage payment, potential property taxes, potential utility bills, condo fees etc.)
– Stress test results. You need to prove to the lender that you are capable of affording your mortgage payments if interest rates increase. To do so, the lender will calculate whether they would approve you at an interest rate of either 5.25% or your potential rate plus 2%.
Applying For A Mortgage With Bad Credit
Bad credit can definitely limit your ability to get a mortgage, but there are a few different things you can do if you find yourself worrying about a lender’s perception. It’s important to note that the options presented when applying for a mortgage with bad credit will all come with higher interest rates, so if you can wait and give yourself time to improve your credit score, that’s always advisable.
Choose Your Mortgage Lender Wisely
If your score falls below 600, you’re going to have a very difficult time getting approved through Canada’s major banks. So instead, you’ll more than likely want to work with an alternative lender. These lenders are definitely more lenient, but you’ll likely have to make a higher down payment (think 20% – 35%) and deal with higher interest rates, so approach with caution.
Make A Larger Down Payment
If you need another way to demonstrate your financial stability to lenders, consider making a larger down payment of 20% or more to show that you have a sizeable income and budgeting prowess. This will also help you reduce your monthly mortgage payments which will make them more manageable in the long-run and make you a more attractive borrower in the eyes of the lender.
Look Into A Co-Signer Or Joint Mortgage
If the first two options aren’t feasible, consider seeking out a co-signer. Essentially this person promises to make your mortgage payments if you can’t. Having a co-signer makes it easier to apply for mortgages from traditional lenders since they’ll be factoring in the co-signer’s credit and income. If you decide to go this route, make sure you choose someone with good credit, good income and not a lot of debt who’s willing to sign for you.
How To Improve Your Credit Score
What’s important to remember is that credit scores are always changing, so don’t get too upset if you find yours is currently low. There are lots of ways for you to improve it on your own. Get serious about paying bills on time, stick to a max usage of 30% of your credit limit and resist the urge to apply for store credit cards. Committing to these consistent changes in your behaviour will increase your credit score in a few months.
Avoid Credit Inquiries
Occasionally you may need to apply for more credit. Just make sure that when you do so, you keep these applications to a minimum, so when lenders check your credit report, they don’t see red flags of a borrower who may be living beyond their means or urgently in need of more money. To keep this in check, be sure to limit the amount of times you apply for credit and apply only when you really need it. It’s also important to note that any checks that come through within a 2-week time frame will be counted as one hard hit, so when you’re shopping around for better rates on a car loan or mortgage, be sure to cluster all your appointments so your credit score doesn’t take an unnecessary hit when you’re about to need it most.
Keep Your Credit Utilization Under 30%
While you may have a credit card with a $10,000 limit, that doesn’t mean you should be using anywhere near the maximum credit. In fact, how much available credit you’re using (credit utilization) makes up 30% of your credit score. As a rule of thumb, try to use less than 30% of your available credit as it’s always better to have a high credit limit and use less of it each month.
If you tend to use up a lot of your available credit, lenders may see you as a risk, even if you pay your balance in full when it’s due. To calculate your ideal credit usage each month, add up the credit limits for all your credit products (loans, credit cards etc.) and then calculate what 30% of that total equals so you know how much credit you should be using each month overall.
Bolster Your Credit History
The length of time you’ve been establishing credit for accounts for 15% of your overall credit score so it’s important to keep your oldest credit cards active, even if you never use them. Instead of cancelling your old credit cards, make sure you’re aware of any yearly/monthly fees and try to use the card every so often. Be aware that transferring an older account to a newer one is considered new credit and could damage your credit score.
Maintain Consistent Income
You must be able to demonstrate stable employment and an income that’s high enough to service the mortgage payments. To determine whether your income is high enough, lenders will use something called debt servicing ratios, both gross debt servicing (GDS) and total debt servicing (TDS). These ratios give the lender an indication of whether you can afford to pay the mortgage each month. It’s not a perfect measure as it doesn’t account for your discretionary spending habits, but it does factor in most of your financial obligations.
GDS calculates your monthly housing costs (mortgage principal and Interest, utilities, property taxes) against your gross monthly income. This ratio will ideally be less than 32%. TDS takes all other debt payments along with the mortgage as a percentage of your gross monthly income. The maximum TDS is 44%, but the lower, the better.
Saving Up For Down Payment And Closing Costs
Don’t overlook the costs above and beyond your monthly mortgage payments, like saving up enough money for a down payment and closing costs (lawyer fees, appraisal, home inspection, title insurance, etc.). Your lender will confirm that the money you’re using for these extra costs isn’t also borrowed and that you’ve had this money in your possession for at least 30 days.
While exceptions can be made, it’s important to be aware of these stipulations in advance, so if you’re planning to use an income tax payment to fund your down payment, you know you’ll need to wait at least a month before applying for your mortgage.
Mortgage lenders are essentially looking at the monthly living costs of your potential new home and your current sources of debt. Can you make the necessary payments regularly or will your debt hold you back? It’s important to note that you don’t have to be perfect, but if you’re strong in the areas that matter most to lenders, it can help make the mortgage approval process much smoother.
Credit scores have a huge impact on what mortgage rates you qualify for and your overall approval process. If you haven’t already, you need to learn more about your personal credit score. If you have the ability to hold off on buying a home in the short term, take some time to work on repairing and improving your credit score before you start seeking out preapprovals so you can feel confident that you’re getting the best rates possible.