Building Your Credit To Buy A House

Building Your Credit To Buy A House

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated December 8, 2022

Homeownership continues to be a dream for most Canadians, but this goal is often out of reach for many who still struggle with poor credit scores. Most conventional lenders typically require good credit scores (anything over 660), though there are alternative lenders who offer mortgages to those with low credit. However, these lenders often charge higher rates and fees than banks, making them a more expensive option. As such, it’s in your best interest to build your credit before trying to buy a house. 

How To Fix Credit Fast To Buy A House?

As mentioned, good credit can help you qualify for a mortgage with affordable rates and flexible terms. Here are some ways you can fix your credit fast to buy a house: 

Fix Any Errors On Your Credit Report 

One of the first things you should do is pull your credit report. Understanding your financial and credit position can help you during your mortgage search. Moreover, obtaining a copy of your credit report will give you the chance to see if there are any errors in the report that may be unfairly dragging your credit scores down. 

If there are any errors, be sure to dispute them right away. Having these errors investigated and rectified may result in a higher credit score.

Where Can You Check Your Credit In Canada?

Both Equifax and TransUnion offer consumers their credit reports for free (TransUnion refers to this as a Consumer Disclosure). Equifax also offers free credit scores to all Canadians, while TransUnion offers them for free in Quebec.

There are also several third-party providers that offer free credit scores and reports:

 CostCredit ScoreCredit Report 
CompareHub logoFreeYesYesVisit Site
Mogo logoFreeYesNoVisit Site
Borrowell logoFreeYesYesVisit Site
CreditKarma logoFreeYesYes-

Pay Your Bills On Time

Your payment history accounts for around 35% of your credit score calculation. So it goes without saying that you should make every effort to pay all of your bills on time and in full. Missed payments can not only negatively affect your credit scores, but can lead to late payment fees and accrued interest. By meeting your payment deadlines at each billing cycle, you’ll build a positive payment history which can help improve your credit scores. 

Leave Old Credit Accounts Open

If you have old credit cards that you’re not using all the time, don’t close them just yet. Many people wrongly believe that credit cards that are not being used on a regular basis should be cancelled. However, doing so can actually be bad for your credit scores.

Cancelling an old credit card can decrease the total age of your credit history. If you really want to streamline your accounts, consider closing your new credit card and keeping the oldest ones active. 

Pay Down Consumer Debt (Especially Past-Due Debt)

Reducing your debt can help free up more of your income, as well as reduce your debt-to-income (DTI) ratio and debt-to-credit ratio, which may help give your credit score a boost. And if you have any balances that are past-due, make sure you get back up-to-date to show lenders that you’re being responsible with your finances and are capable of making timely payments.  

Don’t Open New Credit Cards

While you don’t want to close out old credit accounts, you also don’t want to open too many new ones. Doing so can cause your credit scores to dip. As mentioned, the age of your credit accounts can impact your credit scores and opening new accounts can reduce the total age of your credit accounts.  

Don’t Spend Your Entire Credit Limit

Your debt-to-credit ratio is the amount you spend relative to your credit limit. This ratio generally accounts for around 30% of your credit scores. High ratios may negatively impact your credit scores.  Ideally, lenders like to see a debt-to-credit ratio of 30% – 35%, as it shows that you haven’t overextended yourself and can manage your debt load responsibly.

Why You Should Pay More Than The Minimum Balance

Many consumers only pay the minimum balance on their credit cards. While this may be a better option than completely missing a payment, only paying the minimum balance will lead to higher debt. Not paying the full outstanding balance of your credit cards will then lead to a higher debt-to-credit ratio which may have a negative effect on your credit scores. 

If you can’t make the full payment, at least pay more than the minimum balance. Not only can it help with your credit scores, but it will also help you pay down your debt faster.

Don’t Take Out Additional Loans

Now is not the time to take out a personal loan, car loan or any other type of loan. If you’re planning on buying a house, adding more debt to your financial profile isn’t a good idea. When you’re trying to improve your credit, you don’t want to make things harder for yourself by adding more debt to have to pay off. Your goal is to pay down your debt, not add to it, so resist the temptation to take out a new loan until your credit has reached the place you want it to be. 

Other Options To Help You Build Your Credit To Buy A Home

The following options are useful if you’re unable to access traditional credit to build your credit profile:

Get A Secured Credit Card 

Having a credit card and making payments on time each month is a great way to help build good credit. But if your credit score is on the low end or you have not yet established any credit at all, it can be nearly impossible to get approved for a traditional unsecured credit card. In this case, a secured credit card may be a good option. 

Secured credit cards are easier to get approved for and can help you build credit the same way an unsecured credit card can. All you need to do is put down a deposit, after which you can use the card for purchases. With every timely payment you make, you can help increase your credit scores.

Annual FeeInterest RatesMin. Deposit
Neo CardTM (Secured)$019.99% - 24.99%$50
Plastk Secured Visa Credit Card$48 (+$6 monthly fee)17.99%$300
Home Trust Secured Visa Card0$ or $59- 19.99% (no annual fee)
- 14.9% (with annual fee)
Vancity enviro Secured Visa Card$0 - $39511.25% - 19.50 %$500
TD Secured Credit Card$2919.9%$500
Capital One Guaranteed Secured Mastercard$5919.8%$75

Save And Build Your Credit With A Credit Builder Loan 

A credit builder loan is a type of loan that is specifically designed to help you build credit, similar to a secured credit card. This loan does not provide upfront cash, rather you make monthly or bi-weekly payments to the lender who will store it in a secured account. At the end of the loan term, the lender will release your funds to you minus any interest and fees. 

A credit builder loan is a good way for you to build credit while saving money. Each payment you make will help you build a healthy payment history, which can help improve your credit and will show lenders that you’re able to make credit payments on time. 

Can You Buy A House With Bad Credit?

While there are plenty of things that you can and should do to give your credit score a boost, it’s still possible to buy a home with bad credit. Although conventional lenders will likely reject your mortgage application if your credit score is under 680, there are other lenders who work exclusively with borrowers who have bad credit.

Find An Alternative Or Private Mortgage Lender

Since your credit score is not a huge factor in the mortgage approval process when working with an alternative or private lender, they will place more weight on other factors. Typically, income, down payment amount, and bank statements are used during the approval process. If you have a healthy income and you save up a down payment, your chances of mortgage approval will be much higher.

What About Buying A House With Bad Credit And A Low Income?

It is possible, though extremely difficult, as you will face many obstacles. For starters, it won’t be easy to come up with much of a down payment if your income is low, and not making a high income will make it more difficult to keep your debt-to-income ratio low enough to qualify for a mortgage. And combining that with a bad credit score will make things that much more challenging.

Your best bet is to take steps to improve your credit, which will make it easier to get approved for a mortgage even with a low income. However, you may also want to make some changes to help give your income a boost.

What Credit Score Is Needed To Buy A House In Canada?

Generally, lenders require a minimum credit score of 640, however depending on the lender that minimum can fluctuate between 620 and 680. The minimum credit score needed to get approved for a mortgage can also vary depending on the strength of your finances. For example, your down payment amount, your income level, and your debt level are all factors that can influence the credit score requirement for some lenders. 

What Do Lenders Look At For Mortgage Approval?

In addition to your credit score, lenders look at the following key factors when determining whether or not to approve your mortgage application:

  • Your income. Lenders want to make sure that you earn enough to cover both your existing debt and your new mortgage payments. 
  • Down payment and deposit. A mortgage will help cover the majority of the home’s purchase price, but you’ll still need to come up with some funds on your own. Your home deposit will show the seller and lender that you’re financially capable, while a sizable down payment will show the lender that you are a less risky borrower.
  • Cash for closing costs. Closing costs can add up to be anywhere from 2% to 5% of the purchase price. These costs must be covered at the time of closing, so you’ll need to have the liquid cash available to seal the deal. 

Building your credit to buy a house FAQs

What is the quickest way to build credit to buy a house?

Making timely payments is the best way to build good credit. You can do this by taking out a secured credit card or a credit building loan and making timely payments on each billing cycle. Also, make sure not to spend any more than 30% of your credit limit on your credit cards. And if you have old accounts open with several missed payments on record, settle those accounts as soon as you can. 

How is my credit score to buy a house calculated?

Canada’s two major credit bureaus, Equifax and TransUnion, calculate your credit score based on information on your credit report. The different factors which make up your credit report are your payment history, length and mix of credit, and credit utilization, among other smaller factors. 

Why do lenders check your credit when applying for a mortgage?

Lenders like to see high credit scores from borrowers because it provides them insight on the consumer’s likeliness to repay their debt. If you have low credit, it generally means that you’ve had trouble repaying your debts in the past (ex: missed or late payments).  In this case, it may be difficult to get approved for a conventional mortgage because lenders consider consumers with low credit scores a higher risk.

Final Thoughts

Having a healthy income and good credit is your best bet for improving your odds of mortgage approval. That said, there are many consumers out there who don’t have a high credit score but still need a mortgage to buy a house. If you have bad credit, take steps to improve it before applying. If you cannot wait, look to alternative lenders who work exclusively with low-credit borrowers.

Rating of 4/5 based on 7 votes.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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