While most Canadians do their best to save up a large sum for a down payment, the vast majority need to rely on a mortgage to be able to buy a new home. However, whether you are approved for a mortgage and what kind of rates you get depend on your financial health, including your credit score. Here’s what you need to know about credit score requirements for mortgages in Canada.
What credit score do you need to be approved for a mortgage in Canada?
When it comes to getting a mortgage, the higher your credit score, the better. A good credit score will ensure that you:
- Actually get approved for the mortgage, and
- Get a favourable interest rate
In Canada, credit scores range from poor (around 300) to excellent (900). Anything above 650 is considered to be good, which means that your risk for defaulting on your mortgage is low and you’re a safe candidate for a loan.
While it will vary from lender to lender, in general, the minimum credit score to be approved for a mortgage is 650. Some lenders may go a little lower, but again, higher is better. A credit score above 700 is considered optimal when applying for a mortgage.
Several factors can impact your credit score, including:
- Payment history. Do you pay your credit card bills on time?
- Credit utilization. You should use less than 35% of your available credit.
- Credit history. The longer you have had your credit accounts, the better.
- New credit requests. How recently and often have you applied for new loans or credit cards?
- Types of credit. Having a mix is best, such as a credit card and a line of credit.
If you’re unsure of your credit score, you can get it from one of the two credit-reporting agencies in Canada: Equifax Canada or TransUnion. You can request a free copy of your credit score each year (or look it up anytime you want for a small fee).
» MORE: How to check your credit score
How your credit score affects your mortgage
Your credit score can have a positive or negative impact on your mortgage. A high credit score will work in your favour, while a low score or no credit history will work against you. This is because your credit determines how much of a risk you are for defaulting on your mortgage loan.
If your credit score indicates that you don’t have a lot of debt and make regular, timely payments, you’ll have a higher credit score and will be seen as low-risk. If you have lots of debt and pay your bills late, you’ll have a lower score and will be seen as high-risk.
Understandably, banks don’t want to lend lots of money to someone they deem as potentially unlikely to pay it back. If they do, it will be at a much higher interest rate that reflects that risk. Those higher interest rates mean higher mortgage payments and a larger cost over time.
What other factors do lenders consider when you apply for a mortgage?
Your credit score plays a large role in the mortgage approval process, but it’s not the only factor a lender will look at when deciding whether or not to approve your loan. Other key factors include:
- Debt-to-income ratio. If you have little or no debt and a high income, you’re more likely to get away with having a slightly below-average credit score.
- Debt service ratios, like your gross and total debt service ratios
- The amount needed for the loan (a larger loan is riskier)
- The purpose of the real estate you’re buying
- The amortization period
- Your history of debt management
- Your employment record
- Monthly housing costs associated with your new home (mortgage payment, potential property taxes, potential utility bills, condo fees if necessary, etc.)
- Debt load (credit cards, car payments, student debt, line of credit, etc.)
- Stress test results. You need to prove to the lender that you are capable of affording your mortgage payments if interest rates increase. To do so, the lender will calculate whether they would approve you at an interest rate of either 5.25% or your potential rate plus 2%.
Can I get a mortgage with bad credit?
Most big lenders, such as major banks, are pretty strict regarding requirements for mortgage approval. Since your credit score is a key factor, chances are a big bank won’t approve you if you have poor or limited credit. However, that doesn’t mean that you’re completely out of luck.
People with lower credit scores can look to credit unions and trust companies or subprime and private lenders to see if they will approve you. These types of financial institutions are usually more likely to help individuals who are considered risky borrowers. That being said, if you apply for a mortgage with a bad credit score, you’ll likely be given a significantly higher interest rate.
If you have a poor credit score or limited credit history, other options include:
- Saving more so that you have a larger down payment
- Considering a joint mortgage
- Adding a co-signer
That said, it’s probably in your best interest to delay your mortgage application and house-hunting process. Take the time to pay down your debts and improve your credit so that you can be approved by a big lender and get the best interest rates possible.