Rounding it up
To ensure you’re approved for a mortgage, and to get the best rates, you need to have a good credit score
Credit score requirements for mortgages differ between lenders and types of mortgages, but generally you need to have a score that’s considered “good” or “excellent”
There are ways to build your score if your three-digit credit score is currently considered “poor”
If you’re looking to buy real estate in Canada, the chances are you’re going to need a mortgage. Unless you happen to be ludicrously wealthy and can buy a house with cash (this blog is not for you!), you’ll require some help from a bank or lender in the shape of a mortgage to secure your new property.
And when it comes to mortgages, you’re going to need a decent credit score. Your credit score will dictate whether or not you are approved for a mortgage and will contribute to the rates you receive. The higher your credit score, the better your mortgage.
So, let’s learn a bit more about credit scores, mortgages, and how they interact with one another.
Importance of credit scores
First, we need to understand what your credit score is and why it’s important to build it up.
What is a credit score?
Your credit score is a three-digit number that basically lets lenders know whether or not you are trustworthy to lend money to. It represents your credit borrowing history and how well you repay your debts on time. You build your credit score over time by borrowing and repaying credit – like your student loan, credit card debt, and car repayments. Other criteria are also taken into account when calculating your score, such as credit utilization (how much of your available credit do you use), how often you apply for new credit, and the type of credit mix you have (for example, credit cards plus lines of credit). When you borrow money, lenders report your loans and repayments to credit bureaus, who log and calculate your score.
So, what’s a good credit score in Canada?
In Canada, credit scores range from around 300 (the lowest) to 900 (the highest). Anything above 660 is considered good (660-724 is considered good, 725-759 is considered very good, and 760+ is considered excellent). Generally, if you have a good-excellent score, you should have no problem qualifying for a mortgage. A good score means lenders can trust that you are a low risk to default on a loan, meaning you would make a safe candidate for a mortgage.
How do you check your score?
If you need to know your credit score, you can find out – there are a few different ways to do so, but you want to be careful when, how, and how often you check it. It’s important you’re undertaking “soft enquiries”, not “hard enquiries”. One way to check your score is to use a third-party service, such as Borrowell, which allows you to soft check your own score for free. You can also talk to your bank, who may be able to do a soft enquiry for you free of charge. Soft enquiries do not affect your credit score. Hard enquiries, however, will affect your score. Hard enquiries are conducted by lenders when you apply for a loan or credit card, and they will cost you points from your score.
What credit score is needed for a mortgage?
A mortgage is a loan from a bank or lender for the purpose of buying a house or other real estate. Banks and lenders need to know that you’ll be able to pay back the mortgage loan they lend you, so there are pretty stringent rules in place to protect them (and you) from failed mortgages.
There are a number of things lenders look at to approve a mortgage – but one of the most important factors to quickly rule an applicant in or out is their credit score. If your score is too low, you’ll have a hard time securing a mortgage with decent terms.
What is the minimum credit score needed for a mortgage?
So, what’s the magic number? In truth, there isn’t really a hard cut-off. Anything above 680 should easily get the job done, but it’s possible to be a little lower than that and still be approved. The credit score needed for a mortgage will differ between lenders and between mortgage types. A credit score of 640 would likely get you approved, but there may be a few more hurdles. Really, the higher the better!
Other factors for mortgage approval
Your credit score isn’t the only thing lenders check when deciding whether or not to dish out a mortgage. While your credit score is probably the most important factor, there are other things they consider. If you suspect you’re right on the cusp of failing the credit score criteria, you’ll want to be aware of these other factors.
Your debt-to-income ratio is essentially how much you owe versus how much you earn. It’s worked out by comparing your monthly debt payments (credit card balances, rent, other mortgages, car loans, insurance payments) and your monthly income, and it’s used by lenders to determine how well you manage your debt and your loan payments. Debt-to-income ratio is calculated as a percentage. A lower percentage illustrates a more comfortable debt load and better ability to repay debts. A ratio of 36% or lower is considered good, and anything over 43% would be unattractive for lenders.
Lenders need to know that you have a regular, stable income. You’ll need to prove you’re earning enough to pay your monthly mortgage bills. Generally, lenders will need proof from your employer of your salary or hourly wage, your position, and length of employment. Lenders do like to lend to borrowers who have been in the same company for two or more years, but that’s not a prerequisite. If you’ve recently started a new job – especially if it’s a jump in title or pay – you shouldn’t be punished. If you’re self-employed, you’ll need to prove your earning power with two years’ of income tax returns plus bank statements.
The money you are able to put towards your real estate purchase is called your down payment. This is the money you have saved (or been gifted by family) towards your property. In Canada, the standard down payment is 20%, although it can be as low as 5%. The higher the down payment you are able to put down, the more comfortable lenders will be giving you a mortgage – the more of your money tied to the property means less of theirs.
If your down payment is less than 20% you will have to purchase Canada Mortgage and Housing Corporation (CMHC) insurance. Mortgage insurance is required on smaller down payments to protect the lender in the case you're unable to make your mortgage payments and default on the loan. Mortgage insurance, as an added monthly cost, adds to the overall cost of your mortgage.
What can you do if your credit score is poor?
Big traditional mortgage lenders are strict about their approval criteria for mortgages. And one of the biggest factors in approving you for a mortgage is your credit score – so there’s no real workaround here. You need a good credit score if you want a traditional mortgage with decent rates.
There are other mortgage options, but they’ll offer worse rates. Credit unions might be your safest next best option, followed by subprime and private lenders. Rates from subprime and private lenders will be much higher than banks and should generally be avoided.
Improve your credit score before you apply
If your credit score isn’t yet high enough to qualify for a mortgage, your best bet is probably to bide your time and build up your score. By taking some time to pay off your debts and improve your score, you’ll save yourself money and heartache in the long run. Once your score is higher, you’ll be in a better position to compare and choose between the best mortgage rates offered across the big lenders.
You can build your credit score by paying your bills in full and on time, using less than 30% of your credit limit on credit cards, build history with credit cards rather than switching to new cards, and don’t apply for too much new credit in a short window.
KOHO Credit Building
You can also build credit KOHO. KOHO’s Credit Building tool helps you build your credit score fast. You simply open a no-interest line of credit and make small repayments every month. In just six months, with regular on-time payments, you can build your credit score.
Can you still get a mortgage with a poor credit score?
Yes, you can still get a mortgage with bad credit. The thing is, though, you probably shouldn’t. Your options are going to be severely limited – you’ll likely need to consider high-interest loans through private lenders, and you’ll end up paying much, much more than you would through traditional avenues. The best thing to do is build up your credit score so you can get better rates and save money in the long run.
Your credit score is critical for getting approved for a mortgage and getting the best rates. Ideally you’ll be able to get your score up over 680 before applying, to ensure you gain access to your pick of lenders. Anything lower than that and you’ll need to shop around and consider different options. If your score is low, you should focus first on building your score up before seeking a mortgage, to give yourself the best shot at success.
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.