One of the most anxiety-inducing parts of getting a mortgage is wondering if your credit score is good enough to be approved for the mortgage you want. Since your credit score not only determines whether you’re eligible for a mortgage but also has an enormous influence over what the interest rate will be, it’s important to know where you stand in the eyes of the banks.
Getting a mortgage is much easier with a higher credit score, but how high is high enough?
Here’s how it works:
What The Banks Look At
After you apply for a mortgage, the bank will request a credit score from one of the two major credit reporting agencies in Canada: Equifax or TransUnion. In some cases, they’ll request credit scores from both companies and use the lowest score to make their decision.
For the agencies to give you a good score, they’ll want to see that you have a credible history of borrowing and repaying that goes back at least 1 to 2 years. Preferably, you’ll have a history with at least two kinds of debt, such as credit card debt, a personal loan, or a line of credit.
This is why you want to start creating a credit history as soon as possible. If you’re thinking of buying a house, then purchasing everyday items with a credit card and paying them off in full each month is an effective way to make yourself a safer investment for a lender.
Aside from what the reporting agencies will find there are a few other things that you’ll want to make sure check out when applying for your new mortgage. For instance, if you are seeking a mortgage with a co-borrower (your spouse, most likely), then it’s important to know if there is a major difference between your credit scores. The banks will use whichever score is lowest of the two of you, which can mean higher interest rates. In some cases, it may be wise to apply for your mortgage as an individual if one of you has a dramatically better credit score.
Also, while credit scores are important, they’re not the only factor in determining whether you can get a mortgage. The banks will undergo a thorough investigation of your financial history, checking out your payment history, whether you have any unpaid debt, the age of your accounts and more. Only once they’ve constructed a full picture of your financial situation will they make the offer to lend you the funds for a mortgage.
That being said, a poor credit score is often times a deal-breaker.
The Ideal Score
In most cases, having a credit score of about 620 is probably enough to be eligible for a mortgage, but at that score, you might not be able to find one that is affordable. Anything below 600, with some variation, is considered a subprime mortgage and will have substantially higher interest rates. The minimum score you need in order to avoid price adjustments is around 720, but to enter the process worry free, it’s recommended to have a score of 760 or more.
From a buyer’s perspective, dealing with the fine print from the banks can feel confusing and at times stressful. That’s why consulting with a mortgage broker is such a vital step forward on the road to owning a home. Aside from expert advice, an experienced broker can give you access to a wide variety of lenders, maximizing your number of options when it comes to finding the right mortgage options for your specific financial situation. Without a broker, you can find yourself a victim of the strict rules of the banks which can have many guidelines that work to the bank’s advantage opposed to your own.
If you’re thinking about buying a home, and want to know more about credit scores or would like to know what rates for a mortgage you can expect, give me a call at 705-315-0516. As a knowledgeable mortgage broker in the Barrie area, I can help you understand your options to leverage your credit score to secure an affordable mortgage while ensuring you have the best rates at every turn in the road towards your new dream home.