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If you are in the market for a property, one of the determining factors to get approved for a mortgage is a credit score. Sure, you need a downpayment, and income but a credit score shows lenders how you manage credit. Without an acceptable credit score, getting a mortgage will prove to be a challenge. Understanding how credit scores work will help you know what you need to be approved for a mortgage in Canada.
A credit score in Canada is a three-digit number that summarizes someone’s credit history. It shows lenders and financial institutions how ‘good’ the individual is with managing credit and how likely they are to pay back their debts on time. The score is used in determining the approval status and specific rate of a customer financial product such as:
A higher number indicates a better chance of approval for a loan at preferred rates. Credit scores are calculated through a careful analysis of information that has been made available to credit bureaus. To calculate someone’s score, credit bureaus look at debt, bill payment history and credit utilization.
If you are applying for a mortgage, credit card, personal loan, or other forms of credit, a lender will run a credit check to see your score.
If your credit score is 760 or higher, you have “excellent” credit and you can expect the best rates and terms on loans you apply for.
If your credit score is anywhere from 725-759, your credit score is considered “very good” and lenders will be satisfied with this range.
A credit score between 660 and 749 is “good” but lenders start getting a bit wary with lower credit score and may require you to tackle some debts, find a co-signer, or agree to more detailed terms and higher rates.
Credit scores below 560 points are “poor” and you can’t be too picky when it comes to lenders and the terms they offer you. The lower your credit score is, the worse the terms you’ll have access to.
In Canada, mortgages are available from several types of lenders including banks, mortgage companies, credit unions and other institutions. A mortgage broker can walk you through the mortgage approval process in Canada and help you explore different options. A broker can also find a lender that best suits your needs. While a credit score is important to qualify for a mortgage, here are some other factors that will also be considered:
To qualify for a mortgage, you need to show the lender that you can afford and manage the loan you will be borrowing. A lender will calculate if you can handle the payments based on your credit history, current income, and debt. Another step of qualifying for a mortgage at a bank is the ‘stress test’. This test is run to see if you can afford payments at a higher interest than your current terms (in case interest rates go up).
If your credit score is below 620, here are a few things you can do to increase your credit score.
Lenders want to see that you will pay loans back, and on time. If you miss a payment, they are recorded and stay on your record which brings down your score. When you pay your bills on time, you are rewarded with more ‘points’ on your report.
Don’t max out your credit cards! Keep your credit usage below 30% to increase your credit score. For example, if you have a credit limit of $5,000, don’t put more than $1,500 on your credit score. If you continually ‘max out’ your cards or line of credit, it’s a red flag to the credit bureaus.
Keep your credit cards and lines of credit open to show a long history of credit use.
Show lenders that you can manage different kinds of loans. Credit can include mortgages, lines of credit, car loans, credit cards, and more!
Every time you have a ‘hard check’ on your credit report, your score gets ‘dinged.’ Instead, use a broker to shop around for you and help keep your credit score high.
By following these tips, you can boost your credit score which is a crucial step to secure a mortgage. If 2020 is the year you want to become a homeowner, make sure you have all the pieces in order. Keep an emergency fund, crunch the numbers, line up your team including an agent, insurance provider, lender, and home inspector.
