Buying a house is usually a big and exciting step in our lives. Once you’ve found the house you love, and contact a mortgage broker to secure the mortgage you need to buy it, your credit score is one of the first things that you will be reviewed by your mortgage lender. A Credit score is a 3-digit number that represents your credit information at one point in time. In short, it tells lenders the risk of lending money to you. It is an indication of your financial responsibility. Private mortgage lenders and banks use it to consider what loan you may qualify for or if you qualify for a mortgage loan at all.
In Canada, credit scores range from 300-900. On this scale, higher scores are good. A high credit score indicates to lenders that lending you money for a mortgage is a low-risk investment for them. When your credit score is low it tells a mortgage lender that you might be likely to default on your loan payments. The possibility of defaulting on your mortgage means that they might not get their money back after lending it to you.
How does a mortgage lender know what your credit score is?
Your credit history is shown on a credit report. Lenders use your credit report as a tool to decide whether to give you credit or not; credit being another word for a loan. Mortgage lenders and banks providing mortgages prefer to lend money to people with a history of timely payments being made on any money they have borrowed in the past. Why? Because they want to make sure you will pay them back. Think about the last time you lent money to a friend or family member. Did they pay you back in a reasonable time frame or did they take years to give you that $20 back if they ever did at all? If they didn’t pay you back, and you knew that they didn’t pay you back last time, would you lend them another $20 in the future? Probably not.
Mortgage lenders also look at:
- Your income
- Your employment
- Your financial history
- And the market value of the property you intent to buy
Canada has two main credit bureaus that collect and share data about your credit in the country, Equifax and TransUnion. These are private companies that produce your credit report which summarizes your credit activity and uses it to assign you a credit score. These bureaus assess your credit information in their report and included information such as:
- How long you have had a credit card
- If you miss payments
- Whether you stay close to your credit limit
- The number of times you have applied for credit and how often
- The size of any outstanding debts
When buying a home, your assets, income and down payment are all important pieces of the puzzle but your credit score has much more influence in the grand scheme of things. Mortgage lenders want to know that you can pay back what you owe. Especially for large purchases like a house which is often the largest purchase we make in our lives. Your credit score also determines what mortgage rates and terms you qualify for. If you have a higher credit score, you might get a lower interest rate and more flexible payments. If your credit score is low, you may be offered higher mortgage rates or be denied a mortgage altogether. Higher mortgage loan rates mean you will pay higher monthly payments throughout your mortgage too. So if you currently have a low credit score you might want to hold off on buying a home until you have paid down some debt so that you can get approved for better mortgage terms, options and rates. If you do lock in with a high mortgage rate you might pay an astounding amount more for your home long term paying extra interest whereas in a few months time if you can pay down your loans and improve your credit score then apply for a mortgage; it could save you thousands in the long run.
What is the minimum credit score needed to get approved for a mortgage?
The minimum credit score required depends on the lender and mortgage insurer. The Canada Mortgage and Housing Corporation recommend that at least one applicant in mortgage have a minimum credit score of 680 if you are making a down payment of less than 20%. Having a higher credit score means you may have some flexibility on the amount of down payment you will make. A credit score of 750 or higher is considered excellent and better for lending. However, at the start of 2021, the minimum credit score required to get approved for a mortgage is anywhere between 620 and 680, so before applying for a mortgage it’s smart to do a little financial housekeeping in addition to saving a downpayment.
How do you maintain good credit throughout the home buying process?
- Avoid requesting multiple mortgage applications with different lenders within a short period. Ideally, shop for mortgage rates within 30 days of when you plan to buy a home.
- Avoid applying for other loans such as a car loan for some time as this may increase your monthly payments.
- Make all existing credit and loan payments on time and in full.
How can you improve your credit score?
- Pay your bills on time and pay more than your monthly minimum or paying in full.
- Use no more than 30% of your available credit card limit.
- Limit how frequently you apply for credit.
- Review your credit report for any errors your bureau may have reported and signs of identity theft.
How do you get the best mortgage rate possible?
Working with an experienced mortgage broker like myself, Darren Robinson, is a smart move to ensure you are getting the best rates, options, and mortgage terms. Going to the bank for a mortgage, they will offer you one, maybe two mortgage products because that’s all they have to sell you. A mortgage broker on the other hand has many lenders to work with and offer you mortgage loans from. In addition, an experienced mortgage broker can assess your personal situation to help increase your likelihood of getting approved for a mortgage as a self-employed individual or as an individual with a lower credit score. If you’ve secured your first mortgage with your bank and it’s time for your terms to renew, call me, Darren Robinson and let’s take a look at your current mortgage and seek out a better rate, more flexible terms, and mortgage options you need today and in future. Your house is your largest investment, don’t let your mortgage auto-renew without reviewing the details because oftentimes there are big savings to be had by making a few small adjustments. Book a free consultation with me online or give me a call at 705-315-0516 and let’s see what opportunities lie in your real estate future.