Getting approved for a mortgage these days can be a real challenge, especially with housing prices constantly on the rise. In Toronto, for instance, you’ll be paying over $820,000 for a home, which is nearly $100K more than the average price the year before.
Unless you’re rolling in cash, that’s a lot of money to have to come up with in order to purchase a home. Moreover, a lot goes into getting a mortgage. Lenders look at a number of factors when they’re assessing a borrower for a mortgage such as a sizeable down payment, good income and, of course, high credit scores.
Going into 2023, the minimum credit score needed to get approved for a mortgage is 640, though it would be more accurate to say that anywhere between 620 and 680 would be considered a minimum, depending on the lender.
It should also be noted that the credit score required to get approved for a mortgage in 2023 also depends on several other factors associated with the borrower. For example, a borrower with a high income and low debt amount might be able to get away with a slightly lower credit score than a borrower with a lower income and lots of debt.
Similarly, the loan amount required and the amortization period requested will also play a role in the credit score required for mortgage approval. For instance, a higher loan amount would be considered a riskier endeavour for lenders, who may, in turn, require a higher credit score.
Borrowers will also have to undergo a stress test during the mortgage approval process. In order for applicants to qualify for a home loan in Canada, they will have to prove to their lender that they’re capable of affording their mortgage payments into the future if interest rates rise.
| 760+ | Credit scores above 760 are considered excellent. With excellent credit, you can expect to qualify more easily and access the best rates. |
| 725–759 | Credit scores between 725 – 759 are considered very good. Similar to excellent credit, you can expect easy approvals and access to the lowest rates. |
| 660–724 | Credit scores between 660 – 724 are considered good. Here too, you should have no trouble qualifying due to your credit, however, you may not get the same rates as those with very good or excellent credit. |
| 560–659 | Credit scores between 560 – 659 are considered fair. The minimum required credit score for a mortgage falls between the fair and good credit range of 620 – 680. If your credit score is below 620, you may find it hard to qualify for a mortgage with a traditional bank. You’ll also likely be unable to qualify for the best rates available on the market. |
| 300–559 | Credit scores between 300 – 559 are considered poor. With poor credit, you’d be considered a high-risk borrower. You’ll likely need to apply with a private mortgage lender to get a mortgage and you’ll be charged higher interest rates. |
As we mentioned, credit scores are not the only factor lenders examine before they approve or decline your application. Lenders will usually examine your income, your employment record, your general expenses and your current debts. Other aspects that your lender might look at include, but aren’t limited to:
Mortgage lenders also want to see a favourable history of debt management on your part. This means that on top of your credit scores, lenders are also going to pull a copy of your credit report to examine your payment record. So, even if you have a credit score above the 600 mark, if your lender sees that you have a history of debt and payment problems, it may raise some alarms and cause them to reconsider your level of creditworthiness.
This is where the new stress test will come into play for all potential borrowers. In order to qualify, you’ll need to prove to your lender that you’ll be able to afford your mortgage payments in the years to come. To pass the stress test, you’ll need to qualify for a mortgage at 2% plus the mortgage interest rate you qualify for or 5.25%, whichever is higher.
Besides your credit score, the mortgage lenders will calculate your monthly housing costs, also known as your gross debt service ratio. Generally, you’ll need a GDS ratio of 39% to qualify for a mortgage. Your GDS ratio is calculated by adding all your monthly housing costs and dividing it by your gross monthly income. Housing costs may include your:
This will be followed by an examination of your overall debt load, also known as your total debt service ratio. To qualify, you need a ratio of 44% or below. Your TDS ratio may include your:
A good way to know if you’ll receive mortgage approval before you actually apply is to get pre-approved, which most potential homeowners will do 60-120 days before they plan to purchase a home. This is when your lender examines your finances to determine the maximum amount they would grant you, as well as the interest rate they would give you once you’re approved. A pre-approval will also provide you with a better idea of what your future mortgage payments will look like, as well as how your finances will be affected by your down payment, closing, moving, and future maintenance costs.
For the purpose of the pre-approval process, you’ll need to provide your lenders with various documents, such as:
One important thing to understand here is that the pre-approval is optional and does not actually guarantee that you’ll be approved for the amount you’re pre-approved for in the first place. In fact, even if you’re pre-approved, you still might not be officially approved for a mortgage when you apply. The pre-approval process is simply a way of understanding the debt you’ll be taking on and determining whether you’ll be able to handle the financial strain a mortgage puts you under. It’s also a way of knowing your true price range and showing your lender that you are serious about buying a home.
The minimum credit scores required to get approved for a mortgage mentioned above usually apply to conventional lenders, such as big banks. These traditional lenders are usually quite stringent about their mortgage approval requirements, including the credit scores needed for mortgage approval.
Thankfully, there are options for bad credit borrowers who are looking for a mortgage to finance a home purchase. Credit unions, trust companies, and subprime lenders are potential sources for mortgages for borrowers who can’t qualify with their banks because of their sub-par credit scores. These sources often deal with people who may be viewed as risky to conventional lenders.
It should be noted that if you do plan to apply for a mortgage with one of these lenders with bad credit scores, you will likely pay a higher interest rate than you would if you had higher credit scores and applied with a conventional lender.
That’s why it’s best to consider taking the time to improve your credit score before applying for a mortgage. That way you’ll have an easier time getting approved for a home loan and clinch a lower rate, which will make your mortgage less expensive.
For those who aren’t as familiar with their credit scores, it’s a three-digit number that encompasses all your credit-related activity into one cumulative average. In Canada, credit scores range anywhere from 300 to 900. The higher your credit scores, the better your chances are of getting approved for various loans and other credit products. Generally speaking, credit scores of 660 and above are considered good and means that you are a low default risk and are likely to make your payments on time.
It’s clear that good credit scores are one of the more important factors when trying to gain mortgage approval. It’s also a factor in calculating the interest rate you’ll be given, so having a high credit score can also save you thousands of dollars over the course of your amortization. Therefore, it’s best to get your credit scores in the best shape you can manage before you apply with any lender. Here are a few simple things you can try that may help improve your credit scores.
If your credit scores are below your lender’s standards, it’s possible that your first mortgage application won’t be approved but, don’t give up right away. You can improve your chances by improving your credit scores as much as you can before applying for a mortgage with any lender. This will not only increase your chances of approval but doing so will also help you gain access to better interest rates.
Remember, when applying for a mortgage make sure to do some research in advance to find the best lender for your specific financial needs. Loans Canada can help match you with a third-party licenced mortgage specialist that meets your needs, regardless of your credit.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
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Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.
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