What is the Minimum Credit Score Required For a Mortgage Approval in Canada (2017)?
Ah, the credit score. One of the most important financial lifelines you can have and one that can be the difference between you getting approved or denied for various credit products. In fact, the health of your credit score is almost as critical to maintain as your actual health. While a high credit score definitely isn’t the only thing you need to get ahead in life, especially when you’re a homeowner, it’s always good practice to keep a watchful eye on yours. That being said, one question that a lot of potential borrowers have on their minds is, what qualifies as a good credit score? And for that matter, what is the minimum credit score necessary to get approved for a mortgage in Canada?
For a breakdown of what affects your credit score, check out our infographic.
Have no fear, Loans Canada is here to answer those questions. Being that credit scores are such a significant part of the lending process, it’s no wonder that we get so many inquiries about what qualifies as an acceptable score in terms of getting approved for mortgages. For other credit products, such as credit cards and smaller loans, a lower credit score is not always a deal breaker. However, since a mortgage is one of the most expensive loans that a lender can dish out, they’ll always want to make certain that their clients are reliable enough to pay them back. One of the ways they can judge a borrower’s creditworthiness is by looking at their credit score.
What Qualifies as a Good Credit Score?
If you’re reading this article, chances are that you have some idea as to what a credit score is and what kind of benefits a high score can have. For those who aren’t as familiar with their credit score, 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 score is, the better your chances are of getting approved for various loans and other credit products. Generally speaking, a score of 650 and above is considered good and means that you are a low default risk and a better candidate for lending. A credit score of 750 or higher is deemed as excellent. In many cases, a minimum score of 680 is required for mortgage approval from most A-lenders, like banks and other traditional financial institutions. Unfortunately, a credit score of 600 or under is considered low, meaning you are a higher risk to lenders. A lot of lenders, banks especially, have strict policies about what clients they deem to be qualifiable for mortgages. So, if your credit score is currently under 600, you’ll have to apply with a different organization, such as a private mortgage lender. Or, if you can, it’s never a bad idea to hold off on applying for a little while, until you manage to improve your score.
To know more about credit score ranges, click here.
What Else Do Lenders Look at When You Apply?
As we mentioned earlier, credit scores are not the only factors that lenders take into consideration before deciding to approve you for borrowing, especially when it comes to mortgages. Other aspects that your lender might look at include, but aren’t limited to:
- Your Credit Report/History: Your credit report is a detailed record of your credit product usage. Listed in your report are things like your bill payments (on time, late, missed) from your credit cards and other existing loans. Your lines of credit, liens, bankruptcies, consumer proposals, etc. will also be shown on your report (to find out how long information stays on your credit report, click here).
- Your Gross Income and Employment Record: the money you’re currently making is another important deciding factor for mortgage lenders. Since a mortgage is a huge sum of money, lenders want to be assured that you’re steadily employed and making sufficient income to pay them back periodically, until the end of your amortization period. They’ll also look at things like your employment history from the last two years, and your income tax returns (also from the last two years if you’re self-employed).
Want to know how to get a free copy of your credit report? Read this.
What is Mortgage Pre-Approval?
Before you start looking at houses, it’s a good idea to go through that’s known as a mortgage “pre-approval”. Doing this will help lenders determine your creditworthiness and calculate the interest rate that you’re able to receive for your future mortgage payments. Potential borrowers usually start this process 60-120 days before they decide to purchase a home. During that time, all the personal information in the section above will be under the lender’s microscope. If and when you decide to apply for pre-approval, you and your spouse (if any) will need to provide sufficient proof of your identification, citizenship, assets, and liabilities. Make sure to bring a photo I.D (such as a passport or driver’s license), a record of your employment (such as a pay-stub or T-4 slip), and a letter from your employer testifying to your employment. For banks, you may also need to provide them with your income tax return slips from the last two years.
Pre-approval also helps with your home buying process. While pre-approval itself is optional, getting it done is a good way to both establish a file with your lender (making the final approval process more convenient) and show future home sellers that you are a buyer that’s worth considering, after you’ve made your offer. For realtors and sellers, the fact that you made the effort to go through the pre-approval trial means that you’re more likely receive (and continue to receive in the future) financing than someone who didn’t get pre-approved.
How to Improve Your Credit Score
As we mentioned above, your credit score is not only a determining factor getting mortgage approval, it also has a direct effect on the interest rate you’ll be given once you are approved. The interest rate you’re paying, along with your regular mortgage payments, is another financial issue that absolutely needs to be factored in when you’re living on a homeowner’s budget. Unfortunately, many homeowners don’t take their interest rate into account before they sign their mortgage term contract. While a high credit score can improve your financial health, a high-interest rate can ruin it, if you’re not financially stable enough to afford it, that is. The higher your credit score, the lower your interest rate is likely to be. So, before you start applying with different lenders, there are a few things you can do to raise your score a few notches, such as:
- Paying Bills On Time and in Full: One of the most important steps to improving both your credit score and your finances, in general, is being punctual with your bills, especially the ones for your credit products. Making late payments or missing payments entirely can damage your credit score significantly, while paying them on time and in full will cause it to rise. If you have one or more credit cards, but can’t afford to pay their full balances, you should, at the very least, pay the minimum monthly balances as specified on your bills.
- Not Carrying a Large Amount of Unpaid Debt: While some debt is actually good for your credit, that debt is only good if you’re being responsible with it. Having a lot of unpaid debt, spread across multiple credit accounts is bad for your financial health and credit score.
- Don’t Apply For Too Much New Credit: When you’re trying to improve your credit score, it’s best not to apply for a lot of new credit all at once. Every time an organization such as a credit card company or other lender pulls a copy of your credit report to determine your creditworthiness, it’s what’s known as a “hard inquiry”. Not only do hard inquiries cause your credit score to drop, but too many inquiries done by too many different parties could make lenders think you have a debt problem and are constantly being denied for credit (want to know for about credit inquiries? Start by reading this).
- Getting a Copy of Your Credit Report: While hard inquiries do cause your credit score to drop slightly, checking it yourself will not. Known as a “soft inquiry”, checking your credit report for any discrepancies is a good way to make sure that your score isn’t being affected by an error that another organization made when reporting your activity to Canada’s two credit bureaus (Equifax and TransUnion). When you order your credit report by mail, it should come with an extra form specifically for disputing mistakes or updating personal information. You can then fill it out, send it back, and if the mistake is valid, your credit bureau should correct it accordingly.
- Get a Secured Credit Card: This is especially important for borrowers who already have poor credit and don’t normally qualify for regular, unsecured credit cards. Secured credit cards require a security deposit, usually the amount of available credit the borrower wants. That deposit is used as collateral, in case the borrower defaults. If said borrower upholds a good record of responsible credit usage, they should be able to raise their credit score, then apply for a regular credit card. Once they’ve paid whatever balance remains on their secured card, they can cancel it and their deposit will be returned.
These issues are just some of the factors that affect your credit score. For a more detailed article about how to increase your credit score quickly, click here.
Interested in how much it will cost you to purchase a house in your city? Check out this infographic.
Can I Get a Mortgage if My Credit Score is Low?
True, we did say earlier that most banks will not consider mortgage approval for potential borrowers that have a credit score under 680. That might cause you to look at your score of 670 and get discouraged. However, one important thing to understand is that every lender’s specifications and approval criteria are different. Banks, for example, are stricter businesses that must uphold to certain standards. But again, there are many types of lenders out there that grant mortgages, like trust companies, credit unions, and private mortgage lenders, many of which cater to borrowers with lower credit scores. Yes, having bad credit and a low credit score does impact your ability to get the best interest rates, but it won’t necessarily impede you from getting a mortgage altogether, even if you’ve gone through a consumer proposal or bankruptcy at some point in your life.
Have you recently gone bankrupt? Find out how to rebuild your credit after a bankruptcy with this article.
So, for any would-be borrowers with less than favorable credit scores, if your first application at your bank gets denied, don’t give up right away. If everyone with a score under 680 got rejected for mortgages, the population of homeowners in most cities would be sparse, to say the least. That being said, before applying for a mortgage with any lender, it’s best to improve your credit score as much as you can, since doing so will help you gain access to better interest rates. Remember, applying for a mortgage is the same as for any other credit product, in the sense that the lender will have to make a hard inquiry on your credit report, causing your score to drop a few points. So, when you’re starting to get serious about buying a house, make sure to do some research in advance to find the best lender for your specific financial needs. And, if you ever need any help with your mortgage questions, Loans Canada is here to guide you