With the recent changes in the Canadian real estate market, prospective buyers are really feeling the pressure. If you’re considering buying a home, there are a number of things you need to have in place before you begin the process of getting pre-approved. One of the most important steps is ensure you have a good credit score. We sat down with Olena Vus, a Mortgage Agent at Outline Financial, to get answers to your all your mortgage and credit score questions.
Is there a minimum credit score to get a mortgage?
Most banks and lenders have minimum credit score requirements in order to be eligible for mortgage financing. Equifax and TransUnion, two of Canada’s main credit reporting agencies, are where lenders will find your credit rating. Credit scores of 660-724 are considered good, 725-759 are considered very good, and 760+ are considered excellent.
Generally, with credit scores above 600, clients will be able to pursue financing through major lenders (e.g. banks, credit unions and monoline lenders).
Scores in the low 600’s or lower are often held to increased scrutiny and in most cases, make borrowers ineligible to obtain the most favourable rates, terms and conditions through conventional lenders.
Does your score affect how much you’re approved for?
All credit scores above 660 will give you the same initial mortgage qualifying powers. However, the higher the credit score, the more likely the lender will be able to make beneficial lending exceptions when it comes to borrowing amount etc.
That being said, with a 20% down payment through alternative lenders, client with lower credit scores may be able to qualify for the same amount of a mortgage as borrowers seeking a mortgage through a major conventional lender.
Does having a better score save me money on my mortgage?
A credit score in the range of “good to excellent” (660+) allows clients to shop for a mortgage through the major lenders, which would mean lower rates than the rates offered by alternative and private lenders. Some conventional lenders will also offer better rates to clients with excellent scores (800+).
Will I pay more if I have a lower score?
Borrowers with lower credit scores may find themselves looking at alternatives to conventional lending, which could mean higher interest rates, higher fees and an increase in the carrying costs from a month to month basis. With scores in the low 600’s and below 600, clients would be looking at using alternative lending channels with higher rates and any additional lending fees that would apply.
Is your score affected when you apply for a mortgage?
One of the most common questions we answer is how having a mortgage application/credit check will impact a potential borrower’s credit score.
It’s important to keep in mind that Equifax expects consumers to shop around for their mortgages and they do not penalize consumers for doing so. Equifax has what is referred to as a “de-duplification” rule, which basically means that an unlimited number of inquiries can be performed within a 45-day period for mortgage purposes and it’s treated as one inquiry from a scoring perspective. However, it’s important to note that the de-duping rule applies ONLY for mortgage applications. If you were to shop around and apply for 5 different credit cards, your credit score would be negatively impacted.
What can you do to ensure your credit remains as strong as possible?
Always pay your debts as per the terms of your agreements. Do not EVER miss a payment. Even making only the minimum payments in the event you are unable to pay a balance in full will keep your credit in good standing. Remember to keep credit utilization to a minimum (keeping balances below 80% of the limit) and keep the number of active credit items to a minimum (you don’t need to have 10 credit cards).
It’s important to check your credit score often (Equifax suggests every 6 months) and make sure you effectively manage your credit so that your mortgage application looks as strong as possible in a prospective lender’s eyes.
Understanding your credit score
There are some considerations to keep in mind to ensure your credit score is as strong as possible, which in turn will make you much more attractive to any potential lenders. Below are the 5 pillars that go into determining that credit score.
Payment History. This is the single largest factor in determining your credit score. Missing payments and/or making late payments will bring down your credit score drastically and will deem you less credit worthy.
Utilization. Similar to missing payments, if a borrower is “maxed out” on their credit cards/lines of credit, etc. and is carrying balances close to the limit, this will also bring down their credit score. As a rule of thumb, NEVER allow balances on revolving debt to exceed 80% of the limit. For example, if you have a credit card with a limit of $10,000, carrying a balance at $8,000 or above on a month to month basis will have serious, negative impacts on your credit score.
Credit Mix. This refers to the type of credit you have. Do you have all credit cards or a line of credit, loans, credit cards, etc.? The greater the mix, the better it makes your credit score.
New Credit. Borrowers who have recently obtained a lot of new credit will have their score impacted. A more established credit history combined with the mix of credit you have, the better your score will be.
History. This refers to the number of inquiries made from lenders in order to determine your credit worthiness. Every time you apply for credit (a mortgage, car loan, credit card application, personal loan, etc.) an inquiry is made on your credit file. Having too many inquiries over a short period of time MAY damage your credit score.
Talking to a real estate or mortgage professional can really help make everything you need clear and feel less overwhelming. We work with some of the top-rated mortgage companies in the city, such as Outline Financial, so let us know if you are ready to get in touch with someone and start the process!
