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As housing prices rise with higher interest rates, it’s getting more challenging to get home equity loans and mortgages. The housing prices have increased at a far greater rate than most people’s salaries in Canada. You need a great deal of money to get in on this market and get a good mortgage. There are certain things that lenders look at when it comes to giving you a mortgage. You should have a good amount of money for a down payment and have good credit that proves you’re not high risk. You also need to have a good income coming in.
First, you’ll want to ask yourself if you can afford homes in the current market. Can you afford the monthly payments and property taxes as well as any incidentals that might come up? Here’s a guide on what a lender is looking for in terms of your credit score and how to get an approval.
As of 2023, not much has changed in terms of the minimum credit score you need to be approved for a mortgage. While some lenders may give you a mortgage with a credit score of 620-640, you can be comfortable if you’re at 680. This is the minimum market standard. Even with this number, you may only be able to access lenders who are offering higher-than-average interest rates. When you have a higher credit score, lenders will offer competitive interest rates to get your business.
If you’re looking to get a mortgage, it’s a large amount of money so there are more strict guidelines. It’s important to know what impacts your credit score. If you have a high income and low debt, you may still receive a great mortgage rate with a lower credit score. If you have a low income and a lot of debt with a high credit score, it may not mean you’ll be approved for the mortgage you want.
The loan amount and the period of amortization is also a component with your credit score for mortgage approval. If you have a high loan amount, this is considered a higher risk for lenders. You may need a higher credit score than the minimum suggested at 680. A lender will ask a borrower to take a stress test through the process of getting a mortgage loan. You have to prove that you’re able to afford the mortgage payments even if interest rates rise in the future.
Your credit score is a direct reflection on what you can manage. It shows the lender that you’ve done well managing finances and have the money to make consistent payments. This table shows you how credit score numbers impact getting a mortgage.
| 760+ |
This is an excellent credit score that allows you to qualify for a mortgage loan with the best rates. |
|---|---|
| 725-759 |
Scores between 725-759 are considered to be very good and you will have easy approval with low rates when applying for a mortgage. |
| 660-724 |
If you have a credit score between 660-724, you’re considered to have good credit. There shouldn’t be a problem qualifying for loans but the rates might not be as good. |
| 560-659 |
This is considered a fair credit score but it may not be enough to get a mortgage loan. The minimum required score for mortgages is between 620-680 so you’ll definitely need to shop around to find someone who will lend to you. You likely won’t be getting the best rates either, leading to high interest payments. |
| 300-569 |
If you fall between 300-569, this is considered poor credit. This means you’re considered to be a high-risk borrower. Your only option would be turning to a high-risk lender, a private mortgage lender. This will mean higher interest rates. |
Credit scores are just a part of the puzzle when it comes to mortgage lenders deciding on whether to give you a loan or not. As there’s so much money at stake, the industry has to do their due diligence and reduce risk as much as possible on their end. Lenders are going to look into your income, employment record, expenses, and debt you’re already carrying. Here are some of the other aspects of your life they’ll look into:
Debt Management
If you have historically managed your debt in the past, this will look good. A mortgage lender can look at all the details of your past debt and see exactly how you paid it off. On top of having a good credit score, you should also have an exemplary credit report. If your credit is above 600 but the credit report shows you’ve had problems paying in the past, it can impact whether or not you’re approved for a mortgage.
Stress Test
The stress test involves proving to your lender that you can afford mortgage payment over the long term. Even if there’s a rise in interest rates, you need to be able to pay your mortgage loan every month, on time and in full. You need to qualify for a mortgage at 2% plus mortgage interest rate you qualify for. That, or 5.25%.
Gross Debt Service (GDS ) Ratio
Mortgage lenders are going to calculate your monthly housing costs. This is known as the gross debt service ratio (GDS). They are going to want to see a GDS ratio of 39% to feel confident that you qualify for a mortgage. The calculation includes your housing costs that are divided by your income. The housing costs include:
Total Debt Service (TDS) Ratio
The lender will also examine your overall debt. This is known as total debt service ration. You will need to have less than 44% TDS to qualify for a mortgage loan. The debt that falls under this include things like your credit card payment or car payments. Other considerations are student loans and lines of credit.
One of the ways to reduce stress when it comes to getting a loan is to get pre-approved. That way, there are no surprises or disappointments. You can do this between 2-4 months before you plan to purchase a home. Your lender will go over your finances and figure out the highest amount that you can receive. They let you know what the interest rate is as well so you’re getting a better idea of what your payments will be. You can also identify how your finances will be affected with a certain down payment amount and other costs involved in purchasing a home.
To star the pre-approval process for a mortgage, you need to provide a lender with documents like:
If you can’t qualify for a mortgage loan due to your credit score standings, there’s the potential that your mortgage application will be denied. That doesn’t mean it’s impossible. There are some things you can do to quickly improve your credit score. It may take up to 3 months to improve but if you pay down any credit card debt or other debt, you can greatly increase your credit score. By improving credit and waiting, you can save a lot of money on interest rates.
The pre-approval process for a mortgage is optional and there’s no guarantee that you’ll be approved when you go to take the step of getting a mortgage. You may not be approved for a mortgage when you go to apply despite being pre-approved.
The purpose of the pre-approval process is to offer an understanding of the debt that a mortgage puts you in and if you can handle it. It lets you know what price range you can potentially get approved for. All that being said, it can help you when you apply for a mortgage because it shows you’re serious and conscious about the huge undertaking it is to get a mortgage and pay it off.
There are industry minimums when it comes to getting a mortgage but that doesn’t mean you’re cut off from getting a mortgage completely. The minimum credit score needed for a conventional lender is between 620-680 and other requirements are also looked into. There are options if you’re below the minimum credit score, however.
Credit unions, trust companies, and subprime lenders are another avenue to consider if your bank won’t consider you. Do keep in mind that you’ll be paying higher interest, which can cost a lot over the years you have your mortgage. There are risks to consider before you go this route. Many financial advisors would suggest you build up your credit instead of going with a bad credit mortgage lender.
One of the most notable risks when you apply for a mortgage with a lender who accepts bad credit scores is the higher interest rates. You’re going to get a better loan with a reduced rate if you work on building credit. If you’re willing to be patient, it’s a more financially sound route.
A credit score is three-digits that summarizes all of your activity relating to credit over the years you’ve had it. Credit scores in Canada have a range of 300-900 with the higher score being a benefit. You get a better chance of qualifying for mortgage loans with the best interest rates. When it comes to mortgages, you want to have a credit score of about 660 or more. This allows you to shop around and get the best options out there available. These credit scores define the risk factor to a lender so they will be looked at with certainty.
A few things you can do to improve your credit score include:
It depends on how much money you make. A mortgage lender will look at the Gross Debt Service ratio and the Total Debt Service ratio as well as income, debt, and housing costs.
Yes. You may be able to qualify for a mortgage even if you have bad credit. You may have to look beyond a traditional lender however. A private mortgage lender will often have flexibility and accept borrowers under the threshold of what’s considered good credit.
As a mortgage pre-approval involves a hard credit check, it has the potential to impact your credit.
Some people may be new to Canada so there’s no credit history or very little. Some of the big banking institutions in Canada offer special programs for new immigrants that allow them to get into the housing market.
