When you start your journey to buy a home in Canada, your credit score is a crucial factor to consider because it reveals your history of debt management. Having a strong credit score while buying a property also makes the process easier and more economical — the better your credit score, the lower the mortgage interest rate you'll qualify for.
This post will explain what credit score you should aim for and what choices you have if your credit score is poor.
The Impact Of Your Credit Score On Your Mortgage
Your credit score might have an influence on your mortgage, both positively and negatively. A good credit score will help you, but a poor credit score or no credit history will hurt you. This is because your credit score impacts how likely you are to fail on your home loan.
If your credit score shows that you don't have a lot of debt and make regular, on-time payments, you'll have a better credit score and be considered low-risk. If you have a lot of debt and pay your payments late, your credit score will suffer and you will be viewed as high-risk.
Banks, understandably, do not want to lend large sums of money to people they believe are unlikely to repay them. If they do, the interest rate will be significantly higher to reflect the risk. Higher interest rates imply greater mortgage payments and a higher total cost over time.
What Is Considered A Good Credit Score In Canada?
You might be wondering what a decent credit score is. Credit scores in Canada vary from 300 to 900, with relatively few people falling on either end of the scale. However, you'll be surprised to know most Canadians have high credit ratings ranging from 600 to 800.
Credit scores are assigned in ranges. Here's a rundown of each level to show you how they're classified.
- 800 and up: Excellent
- 720-799: Great
- 650-719: Good
- 600-649: Average/Fair
- Below 600: Poor
Checking Your Credit Score
It's a good idea to check your credit score and request a copy of your credit report well before applying for a mortgage. There are a few options for obtaining this information for free.
One option is to request a copy of your credit report directly from one of Canada's two credit agencies, Equifax or TransUnion. They don't make it simple, though.
Perhaps, signing up with Borrowell or Credit Karma is probably the simplest method. Both firms provide free credit monitoring and will send you an email with your credit score and report every week.
Borrowell will provide you with your Equifax score, whereas Credit Karma will send you your TransUnion score.
Minimum Credit Score Required for Insured Mortgages
When you buy a property in Canada with less than a 20% down payment, one of the three businesses listed below must insure your mortgage: Sagen (previously Genworth Financial), Canada Guaranty, and Canada Mortgage and Housing Corporation (CMHC). The coverage is known as mortgage default insurance or CMHC insurance.
All three insurers need a minimum credit score of 600 or higher for at least one borrower. Surely, they always examine an application's overall strength.
As a result, the minimum credit score necessary to buy a property is 600. Needless to say, the greater your score, the better your chances of acceptance.
Conventional Mortgage Credit Score Requirement
If you have a 20% down payment or more, you will not be subject to CMHC's minimum credit score criteria and can apply for a conventional mortgage. However, this does not guarantee that you will be accepted.
Every mortgage lender has its own set of minimum credit score requirements, and the restrictions are not always rigid. However, you will be hard pushed to qualify for the home loan with a credit score of less than 600, and in many circumstances, it will need to be higher.
Approval of Mortgages: Other Criteria
Your credit score is important in the mortgage approval process, but it isn't the only thing a lender considers when considering whether or not to accept your loan. There's more to getting a mortgage than having a great credit score. Other important considerations are:
- Debt-to-income ratio (DTI). If you have little or no debt and a high salary, you may be able to get away with a somewhat lower-than-average credit score.
- Debt service ratios, such as your total and gross debt service ratios.
- The loan's required amount (a larger loan is riskier).
- The reason you're purchasing real estate.
- The term of amortization.
- Your debt management history.
- Your job history.
- Housing expenditures linked with your new house on a monthly basis.
- (mortgage payment, probable property taxes, utility expenses, condo fees if applicable, and so on.)
- Debt burden (credit cards, car payments, student debt, line of credit, etc.).
- Results of the stress test You must clearly show to the lender that you can afford your mortgage payments if interest rates rise.
A sufficient down payment, a respectable debt-to-income ratio, and a stable job are all required by all mortgage lenders. All of them are signs of financial stability.
Is It Possible To Get Approved For A Mortgage With Low Credit?
Most large lenders, such as major banks, have stringent standards for mortgage approval. Because your credit score is important, a large bank is unlikely to accept you if you have bad or restricted credit. But it doesn't mean you're entirely out of luck.
People with poor credit might check with credit unions and trust firms, as well as subprime and private lenders, to see if they will accept them. These financial organizations are more willing to assist persons who are deemed, risky borrowers.
However, if you apply for a mortgage with a low credit score, you will almost certainly be quoted a much higher interest rate.
Other choices if you have a low credit score or a limited credit history include:
- Increase your savings and have a higher down payment.
- Think about a shared mortgage
- Include a co-signer
Having said that, when you have a low credit score it’s best to postpone your home loan and house hunting and improve your credit in order to get authorized by a large lender and receive the lowest interest rates available.
How to Raise Your Credit Score
Poor credit should not be seen as a financial death sentence. If you have a low credit score, you may work to raise it. Some of them are listed below.
8 Ways to Improve Your Credit Score
- You must pay all of your bills on time.
- Reduce your existing debt.
- Maintain a low credit card balance.
- Avoid applying for new credit.
- Dispute any errors in your credit report.
- When you relocate, notify your lenders.
- Track your account regularly.
- Do not apply for a large amount of credit at once.
Credit Score Requirements For Mortgages: The Bottom Line
Our firm response to the minimum credit score necessary to secure a mortgage in Canada is 600. Anything less than 600 is a complete guess. However, mortgage insurance providers in Canada will consider it, so that's a decent beginning point.
Of course, the better your odds are, the higher your credit score. Furthermore, higher credit scores imply reduced interest rates and mortgage payments. And isn't that the most essential thing?