What Credit Score Do You Need For A Mortgage (and How You Can Fix Yours)
Your mortgage lender needs to be able to trust that you’ll pay them back in full and on time.
Lenders use credit scores as a way to evaluate how well someone manages payment for debts and services. In this way, credit scores help them decide whether or not a client is worth the risk of investment.
What credit score do you need for a mortgage in Canada?
Credit scores in Canada generally range from 300 to 900, with about 650-900 considered as “good” to “excellent”. Each lender uses their own scale of risk.
Canada’s Mortgage and Housing Corporation recently updated their lending rules to define a “good” credit score as 680 or higher. They also set this as their minimum credit score for a mortgage in Canada.
(Note: CMHC also lowered their maximum acceptable debt-service ratio, so if you’re paying down any other loans, the cost of servicing those debts could affect your mortgage eligibility.)
How does credit score affect eligibility and rates when applying for a mortgage?
Qualifying for a mortgage
Traditional mortgage lenders, like banks, follow CMHC’s rules and won’t consider applications that fall above the maximum debt-service ratio or below the minimum credit score.
Secondary/non-traditional lenders are free to set their own criteria. This means that they may consider approving you for a mortgage, even without good credit.
Mortgage lending and insurance rates
If you qualify for a mortgage but your credit score isn’t ideal, the biggest impact will be on your mortgage rate and insurance premiums.
Lenders set their rates and premiums based on the risk to cover themselves from losses in case of customer non-payment. If you can prove you’re a low risk for them to lend to, you’ll get more attractive rates and also save on fees.
The difference adds up significantly – a one-percent change in your interest rate could be worth a few hundred dollars a month on your mortgage payments.
What if I don’t have a Good credit score?
“No credit” and “bad credit” isn’t necessarily viewed as the same risk, and even if your credit isn’t great, you may still have options available.
Bad Credit vs. No Credit
Bad credit means you already have a credit history with some mistakes or late payments, which indicates that you might not be reliable in paying back your mortgage loan.
No credit is an issue more commonly faced by newcomers – you may have equity or credit in another country, but not enough history in Canada yet to get an accurate measure of risk.
Whether you have no credit history or have a credit history in another country (not Canada), the process can be a bit more complicated (but not impossible – don’t worry!).
Having no credit score does not mean that your credit score is zero. Experts say that people with no credit score are considered to be ‘credit invisible’. Not bad, not good, just not visible.
The good news is that going from no credit to good credit is not nearly as much of an uphill battle as turning around bad credit. In fact, there are two products designed specifically to build credit: secured credits (more on that later) and credit-builder loans (a loan in which you make fixed payments to a lender and then get access to the loan amount at the end of the loan’s term).
While most advisors say that it can take at least six months to build a score from nothing, their advice is clear: once you open a credit account, make sure you pay your bills on time, keep your card utilization rate below 30% and keep an eye on your credit score to watch for any changes.
Co-signing a Mortgage
If you want to buy a home right away but haven’t established good credit yet, the quickest solution could be to find a qualified mortgage co-signer.
A co-signer is someone willing to assume the lending risk on your behalf. This person can prove that they would be able to make all payments in the event that you couldn’t (usually this is a trusted family member). You and your co-signer would share responsibility for the full repayment of the mortgage.
How do I improve, repair, or start building my credit?
Whether you want to buy a home as soon as possible or prepare for a purchase down the road, here are the top ways to work towards a good credit rating:
- The first way to improve your credit is to know where you are starting from. While there is a rumour that checking your credit score can actually hurt it, the opposite is actually true. Checking your credit does not hurt your score. In fact, one of the key ways to build good credit is to be aware of everything that’s affecting it (dormant credit cards, identity theft, defaulted loans). That’s why we always recommend regularly checking your credit score to look for any updates
- The second way to improve your credit score in Canada is to keep paying your bills on time. Having a credit card, cell phone contract or utilities in your name has a huge impact on credit. As your customer history, this reflects how reliable you are with making payments and fulfilling obligations.
2. Avoid “maxing out” your credit or letting accounts sit near their limit, as this can severely affect your credit score. Keeping your debt paid down helps prove to lenders that you can responsibly manage the repayment of your loans.
3. A secured credit card is a great way to build or repair credit. A secured credit card is when you provide a downpayment in exchange for credit worth the same amount, which is then treated like a typical loan (with applicable terms and interest). This allows you to build a payment history in a manageable way.
If you have a good income and a reasonable down payment saved up, but aren’t sure how your credit score will affect your application, you can contact one of Cornerstone’s trusted mortgage brokers to learn more about your options.