What is the Minimum Credit Score Required For Mortgage Approval in Canada (2018)?
It’s no secret these days that when it comes to houses, prices are on the rise. A home that was bought for less than $100,000 in the 1970’s might now be worth over $1,000,000 in certain parts of Canada. As a matter of fact, in more popular urban areas like Greater Vancouver and Toronto, real estate investors are willing to pay that much, if not more, just for the plot that the house is sitting on.
However, unless you’re rolling in cash, it seems that it’s becoming somewhat difficult to get the mortgage you want nowadays. There are many qualifications you need, such as a sizeable down payment, a good income and, of course, a favorable credit score. A high credit score is an essential financial tool that can help you in a lot of different ways, particularly when it comes to securing a mortgage. Since a high credit score will not only get you approved for the mortgage money you need, as well as a low-interest rate for your regular mortgage payments, it’s best to keep it in good shape. What is the minimum credit score required to secure a mortgage in 2018, you might ask? If you’d like to know more, keep reading, because Loans Canada has the answer.
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Recent Changes to Canadian Housing Rules
Throughout this last two years, potential and current homeowners alike have seen a number of changes to the general housing rules in Canada, one of them being the addition of the new OSFI Stress-Test. Originally, the Office of the Superintendent of Financial Institutions proposed their new mortgage stress-test in the summer of 2016, as a way to limit the amount of household debt held by the average family. Unfortunately, recent studies have shown that many Canadians are buying houses that they aren’t able to afford. The years roll by and the financial stress caused by their mortgage payments becomes too much to bear. Their pricey houses, coupled with their other expenses can add up to a sizeable yearly cost and even those with good incomes are finding it difficult to handle.
Because of how damaging this level of debt can be for both homeowners and our economy, the new OSFI stress-test soon became a requirement for potential homebuyers planning on applying for high-ratio, insured mortgages (those making less than a 20% down payment), as well as anyone with a mortgage term of less than 5-years. However, as of January 1st, 2018, all homeowners, even those who want conventional, uninsured mortgages (20% or higher down payment) must be subject to the stress-test. Essentially, the new test is a way to determine a potential homeowner’s ability to afford their mortgage payments in the near future. Their payments will be either weighed against the Bank of Canada’s current benchmark rate of 4.83%, or the lender’s proposed rate plus two percentage points.
To learn more about the new OSFI Stress-test and how to stress-test your own mortgage, read this.
While the stress-test is perhaps the most significant change to Canadian housing rules, several other regulations have been put into effect:
- Potential homeowners must now have a maximum “Gross Debt Service Ratio” of 39%. The GDS is a measure that lenders use to determine whether a borrower’s income is enough to afford their mortgage payments from year-to-year. It’s calculated by adding together the annual mortgage payments, with the property taxes and cost of utilities, then dividing that by the potential homeowner’s gross family income.
- Potential homeowners must also have a maximum “Total Debt Service” ratio of 44%. The TDS is similar to the GDS, only the lender adds up all the homeowner-related costs (mortgage payments, property taxes, utilities, etc.), along with other yearly expenses like their credit card interest, car loan payments, and other loan costs. Once again, the total costs are divided by the family’s gross yearly income.
- Effective as of March 2017, the mortgage default insurance premium on insured mortgages will be increased to as high as 4%.
- A 15% foreign homebuyers tax was applied in British Columbia in August 2016 and Ontario in April 2017.
The Minimum Score Required For Mortgage Approval
Generally speaking, the way that lenders assess potential borrowers is based on the level of financial risk they’ll be taking by lending to them. Since most mortgages are for very large amounts and take place over longer payment periods, their standards for qualification are more strict than smaller, short-term loans. While other factors, such as a borrower’s income and current debt level can be equally important, the health of their credit score makes up a large portion of their creditworthiness.
The lower a borrower’s credit score is, the riskier of an investment they’ll be considered and the worse their chances of approval will be. In turn, the higher their credit score is, the less risky they are and the better their creditworthiness is. This is why it’s essential to make sure your own credit score is in the best shape possible before applying for a mortgage with any lender, especially if they’re a bank. Banks and other traditional financial institutions have a stricter approval procedure than credit unions or private lenders, meaning the qualifications of their potential borrowers need to be higher, particularly when it comes to their credit scores.
Check out our infographic to learn more about what qualifies as a low-risk credit score.
In Canada, credit scores range anywhere from 300-900. According to TransUnion, one of our two main credit bureaus (Equifax being the other), a score of 650 (680 in some cases) or higher is where you should aim to be for the best chances of approval. The further a borrower’s score is above that level, the more mortgage money they’ll be granted and the more favorable interest rate they’ll be given.
Under the new mortgage rules, borrowers must have a minimum credit score of 600 at the time of approval, in order to qualify for a mortgage under $1,000,000. If you’re borrowing for your down payment, some lenders might even raise the minimum score to 650. Unfortunately, if your score is below those levels, your chances of qualifying with a conventional lender at all can be slim.
Credit Scores Aren’t The Only Deciding Factor
That being said, as we mentioned, your credit score is not the only element lenders examine before they approve or decline your application. They also want to see a favorable history of debt management on your part. This means that on top of your credit score, lenders are also going to pull a copy of your credit report to examine your payment record. So, even if your credit score is 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.
Other factors lenders take into consideration include:
- Your income
- Your employment record
- Your general expenses
- The amount you’re planning to borrow
- Your current debts
- The amortization period
This is where the new stress-test will come into play for all potential borrowers, starting January 1st, 2018. 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.
As we mentioned earlier, they’ll also calculate your monthly housing costs, also known as your Gross Debt Service Ratio, which includes your:
- Potential mortgage payments
- Potential property taxes
- Potential cost of heating and other utilities
- 50% of condominium fees (if you’re buying a condo instead of a house)
This will be followed by an examination of your overall debt load, also known as your Total Debt Service Ratio, which includes your :
- Credit card payments
- Car payments
- Lines of credit
- Spousal or child support payments
- Student loans
- Other debt
Want to know how much it will cost you to purchase a house in your city? Click here.
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 financial records to determine the maximum amount they would grant you, as well as the interest rate they would give you once you’re approved. It’s also to get 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:
- Proof of identity and residency.
- Proof of employment (salary/hourly rate, time and position at company, etc.).
- If self-employed, Notices of Assessment from the Canada Revenue Agency from the past two years.
- Proof that your finances are suitable enough to afford future payments.
- Information pertaining to your assets (car, cottage, other property, etc.).
- Information pertaining to your current debts and other financial obligations.
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.
For more information about mortgage pre-approval, you can visit the Government of Canada website.
Credit Unions and Private Lenders
Because of these new mortgage rules and standards, real estate experts are now estimating a decrease in mortgage affordability among borrowers of around 20%. As a result, they also expect a boost in profit for credit unions, trust companies, and subprime lenders, where many borrowers will go when they don’t qualify with their banks. These types of organizations often cater towards those with poor credit, and this case, those whose primary lenders consider them too risky. For instance, borrowers who have gone through a bankruptcy, consumer proposal, or other financial delinquency also have an easier time qualifying with alternative lenders.
Just be aware, however, that if you do plan on applying for a mortgage with a subprime lender, you may pay a higher interest rate than with the bank or another conventional lender. For that reason, it’s best to think about your decision very carefully. Though you might have an easier time qualifying, a higher interest rate could mean that you’ll pay much more than you’re comfortable with. That being said, trust companies, credit unions, and private lenders can be a good place to turn when you don’t qualify with a bank.
Check out this infographic to learn how your credit score can affect your daily life.
Taking Measures to Improve Your Credit Score
So, it’s clear that a good credit score is one of the more important factors when trying to gain mortgage approval. Since it’s also a factor in calculating the interest rate you’ll be given, a favorable score can also save you thousands of dollars over the course of your amortization. Therefore, it’s best to get your credit score in the best shape you can manage before you apply with any lender. If your score is lower than 600-650, or you would simply like to improve it as much as possible, there are a few simple tricks you can use.
Get a Copy of Your Credit Report and Dispute Any Errors You Find
One of the first steps you can and should take before applying is to request a copy of your credit report from one or both credit agencies. You are entitled to one free copy of your report annually. Reviewing yours will not only let you know if you’re financially ready to take on a mortgage, it’s a way to discover any errors that are damaging your score and dispute them.
To learn how to get a free copy of your credit report, read this.
Build a Solid Credit History With a Record of Timely, Full Payments
Another thing that lenders like to see on a mortgage application is a solid credit history that’s at least one or two years long, with a variety of well-managed credit products in it. Not only will this show your lender that you’ve been dealing with your debts responsibly, it’s a good way of raising your credit score. Some payments, such as your utilities, phone, and cable bills are not recorded in your credit report and don’t generally affect your credit score. But, payments for your credit cards, loans, and other credit products certainly do. While it can take time, one of the easiest ways of improving your credit score is by making all your credit payments on time and in full. True, sticking to the minimum balance payment will keep collection agencies off your back, but by doing so, you’ll only be racking up more debt because of interest.
Don’t Max Out Your Credit Cards or Carry High Amounts of Debt
Plain and simple, the more debt you carry, the longer it will take you to pay it off and the more of a risk your lender will consider you. Maxing out your credit cards and having a large amount of other debt on your plate is a red flag that makes lenders think you won’t be able to juggle both your debts and your future mortgage payments.
Want to know what happens when you don’t pay your credit card bills? Click here.
Don’t Apply For Too Much New Credit Within a Short Period of Time
While getting your application declined by one lender might make you to want to shop with lenders all over town, doing so can actually damage your credit score. Every time a lender pulls a copy of your credit report, they’ll be performing a “hard inquiry”. Inquiries will be listed within your report and are visible to anyone reviews your credit report for any reason. Only hard inquiries cause your credit score to drop a few points. So, filling out multiple applications for mortgages, or any kind of credit products, for that matter, will surely damage your score. Therefore, it’s best to wait a few weeks between each official mortgage application with any lender.
Get a Secured Credit Card
As we mentioned, one way of improving your score gradually is by making timely bill payments, which can be done using a credit card. However, it’s possible that your credit score is so low that you don’t even qualify for a regular credit card and therefore won’t qualify for a mortgage with many prime lenders. If that’s the case, you can get yourself a secured credit card. They’re called “secured” because they require a deposit in order to qualify, similar to other types of secured credit, where collateral is necessary. The deposit is usually equal to the credit limit you wish to have. With a secured card, you can rebuild your credit history by making regular, timely, and full payments. If you continue this behaviour, you should soon qualify for a regular card, which you can use until you’ve built your credit score back up to the point when mortgage lenders will consider you again. Once you cancel your secured card, your deposit will be returned.
Don’t Give Up!
As we said, if your credit score is below your lender’s standards, it’s possible that your first mortgage application won’t be approved. You may have gone through the pre-approval process and stress-test, only to discover that you don’t have the necessary finances to afford your future mortgage payments. However, this might actually be a good thing, in the sense that you won’t end up with a pile of debt that you can’t handle. Don’t give up hope! With the introduction of the new mortgage regulations, many potential homeowners are finding themselves in a similar position. You are not alone and there are ways you can improve your credit to the point where you will be approved. It takes time and effort, but if you want the home of your dreams, you’ll find a way to make it happen.
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