Many people wonder “what is a good credit score in Canada for a mortgage?”, when they are thinking of buying a home. Having a credit score of 680 or higher will be necessary to meet the minimum credit score for a mortgage in Canada. There are financial institutions that will qualify people with a credit score as low as 600 for a mortgage, however they are more likely to have a high interest rate.
There are many reasons why mortgage lenders require a potential borrower to have a good credit score to buy a house. Lenders are taking a risk when they issue a mortgage, and they want to make sure that the borrower is in a good financial state to pay it back. After all, lenders are trying to make money off of borrowers, and one way to ensure that the loan is a smart investment is by verifying the interested candidate’s credit score.
The reason why a high credit score is so important is that they prove to lenders that you are financially responsible. The higher a person’s credit score is, the likelier it is that they will be approved for a loan. A good credit score will give the borrower better chances of being approved for a mortgage with lower interest rates, reducing how much you will have to pay for your home overall.
What Credit Score Should I Have to Get a Mortgage in Canada?
If you are wondering what credit score is needed for a house in Canada, the higher it is, the better. The following ranges of credit scores will help borrowers get a better understanding of what lenders are looking for.
- 741 or higher: There is no better credit range than this. Having this kind of credit score will ensure that you get the best possible mortgage rates.
- 713 to 740: A credit score between this range is a good one to have, as it will allow a borrower to pay a low interest rate on a mortgage.
- 660 to 712: This is the fair range where approval for mortgages is possible, but where the interest rates start increasing.
- 575 to 659: Having a credit score in this range is seen as below the average. A score of 640 or less may limit your traditional mortgage options. Before applying for a loan, it is best to work on increasing your credit score to avoid high interest rates.
- 300 to 574: This range reflects a low credit score. With this type of credit, a lender would see you as a bigger risk, and you would end up paying the highest fees and interest if you were approved for a mortgage. Since traditional options are limited with this range of credit scores, it would be worth the effort to increase your credit before applying for a mortgage.
Mortgage interest rates will go up for every 20 points your credit score goes down. Mortgage rates are designed to change every 20 points your credit score changes, which is why it is highly advised to get your score in a better place before applying for a mortgage.
How Do Credit Scores Impact Mortgage Loan Insurance?
Not only is a credit score considered when buying a house, it is also reviewed by the insurers of the mortgage. Based on “REP Calgary Homes” Mortgage loan insurance is required for all home owners that put down less than 20% of the loan. These loans exist to cover mortgage repayments in case the borrower is unable to pay. According to the Canadian Mortgage and Housing Corporation (CMHC), their mortgage loan insurance has a credit score requirement of 680, they will help ensure that the borrower gets a reasonable interest rate, with a smaller down payment. Alternative lenders have lower credit score requirements, but also do not come with the financial benefits of CMHC loan insurance, which is why it is important to increase your credit score before applying for a mortgage.
How Can I Buy a Home with Bad Credit?
Having a bad credit score when you want to buy a house can limit mortgage options. While there are still lenders who will approve a mortgage for a lender with bad credit, it will come with high interest to pay. For those that are eager to buy their home right away, there are some fast ways to improve your credit score. For people with less time restraints, it would be to their benefit to take steps to work on increasing their credit score, so that a cheaper mortgage agreement can be made. If you have a bad credit score for a mortgage in Canada, the following steps can be taken if you still want to buy a home.
Pay More Up Front
Having a poor credit score can limit mortgage options, but there are other ways that will prove that you are financially responsible to lenders. Being able to make a down payment of at least 20% on a home will give the borrower more power when applying to mortgages. Putting down a large payment towards your new home will prove to lenders that you have a steady income and are able to save money wisely. This will allow lenders to reduce interest rates and monthly mortgage costs for the borrower. Paying more up front for your mortgage will give you advantages that can save you money over time.
Try More Flexible Mortgage Lenders
Trying to find the easiest bank to get a mortgage in Canada to get approved by can be tricky, especially for those with a credit score under 600. Traditional banks are less likely to take a risk on someone who has a low credit score, whereas flexible lenders are more willing.
While flexible mortgage lenders have less requirements to get approval, they come at a high cost. Since alternative lenders are taking a risk by lending money to people with lower credit scores, they charge an increased interest rate and up to 35% for the down payment.
Working with more flexible mortgage lenders can mean paying more overall, compared to traditional lenders. These lenders may charge fees for handling the loan that may seem minimal but may actually cost thousands of dollars. An additional fee will be applied if a flexible mortgage broker was used, so it is important to understand these high costs before accepting the loan.
Consider a Co-Signed or Shared Mortgage
Another way of buying a home with bad credit is to share the burden with someone who is financially sound. Having someone to back your mortgage reduces the interest and down payment responsibility, since lenders now have a second person to make repayments if the original borrower is unable to. With a strong co-signer the borrower will find more mortgage options available to them, including from banks since the borrower’s credit will be less significant to lenders. The ideal person to share mortgage responsibility with has a steady income, minimal debt, and a strong credit score.
Increase Your Credit Score
The best thing that you can do is to increase you credit score for a mortgage in Canada. You can increase your score by continually reducing your credit card debt, repaying bills by the due date, keeping credit card accounts open, and not submitting applications to new loans or credit. Following these practices for a few months should increase your credit score, giving you better mortgage opportunities.
If you are new to credit and have no score yet, the next section will explain how you can build up you credit in a strong way.
What Can I Do to Increase My Credit Score?
If you know what a good credit score is in Canada for a mortgage, and if you are not quite there, there are ways to increase that number.
- Know what your credit score is and keep track of it: It is important to know what your credit score is before applying for a mortgage. You can do that through LendForAll right now, so that you can start increasing your credit score. Review your score regularly, and once you are at a comfortable score, you will find your mortgage options have increased.
- Reduce your credit card balance: Credit card holders need to aim to have the most available credit on their card. The way a user spends on their credit card can impact their credit score, as the debt to credit ratio is noted on a credit check. According to a recent CNBC article, experts recommend maintaining a credit utilization rate below 30%, with the lower it is, the better your credit score will be.
- Do not miss or skip bill payments: One of the biggest factors that counts on your credit report is how reliable you are at making payments. Since bill payments count for 35% of your credit score, paying the minimum amount by the due date is vital to get a reasonable mortgage. Missing or avoiding payments heavily impact your credit score up to 150 points and stays on your credit report for 7 years.
There are many free apps that will keep track of when you need to make bill payments to avoid being late to pay. Setting up pre-authorized payments for bills is a smart way to set it and forget it, while making sure your credit score increases.
What Other Factors Are Considered By Lenders When Applying For A Mortgage?
Your credit score will hold the most weight when a lender is making a decision about approving you for a mortgage. The lenders also will look at the following factors before the determining the outcome:
- Your earnings
- Where and how much you work
- Your credit history
- Your financial past
- The mortgage amount requested
- Home value
Borrowers that have previously declared for bankruptcy, consumer proposals, or missed payment over 2 months in the last 2 years will have a harder time getting approved for a mortgage, as they will show on your credit report.
Mortgage lenders will also consider potential borrower’s living expenses for your desired new home and how much debt you currently owe and from what.
The expenses that will be necessary to pay each month in a new home are:
- Property taxes
- Condo fees
- Heat and Air Conditioning
The following are the main sources where people have debt in Canada:
- Student loans
- Credit cards
- Running lines of credit
- Car loans
- Personal loans
What Is A Mortgage Stress Test?
Borrowers will also have to face the mortgage stress test, which verifies to lenders that you are capable of paying the high monthly mortgage bills. It is important that borrowers pass the mortgage stress test before they buy their home, since mortgage rates and fees may be more than what they currently pay for living expense.
To be considered for a mortgage, a borrower will need to provide positive results in these areas. Lenders are still likely to approve you for a mortgage, even if some factors are weaker than others, but the better awareness and improvement of these factors will get you a reduced mortgage and interest rates.
A smart move that borrowers can make before looking at purchasing a home is to get pre-approved for a mortgage, so that you know exactly what you can afford. By already being involved with the lender, if you find a home that is outside of your price range, the lender will give tips that can help you afford the desired home.
How Can I Know If I Am Getting the Perfect Mortgage for My Situation?
Being equipped with all the information needed and what the minimum credit score for a mortgage in Canada is, the next step is finding the best mortgage lender for your needs.
Finding the best lender or the easiest bank to get a mortgage in Canada for your situation may require making a few inquires. Going through a traditional bank will present a borrower with several options, but a licenced mortgage broker can also be used to compare these options against alternative lenders and select the best loan and interest for you.
LendForAll can be used to discover and compare mortgages for you, finding the best deal for your financial situation. We can help people by reviewing their credit report, whether you are just getting into the home buying market, or those that need to re-assess your current mortgage to find the best lender for your needs.
Although refinancing a mortgage can cause a short decline in your credit score, LendForAll will review mortgage rates from dozens of lenders helping you find the options where you will have the most success. By doing this, you will reduce formal credit checks that can cause a longer-lasting credit score decrease, making it the smartest choice for borrowers.
Increase Your Credit Score Today!
Now that you know credit score is needed for a house, you can take the necessary steps to attain a reduced mortgage and interest rate. Having a credit score of over 680 will give you the best chances of success, but if yours is less than that, there are options available to you, especially if your score is over 600, but they are more expensive.
Before applying for a mortgage, consider taking time and effort to increase your credit score so that you are not paying more than necessary. This is particularly important for people with no credit score, who will need to build up their credit. Give yourself the best chance to be approved for lower mortgage and interest rates by reducing your credit score, which will allow you to clear your mortgage debt faster.