Lenders consider several factors when determining your eligibility for a mortgage and the interest rate they’ll offer. In addition to your employment history and debt-to-income ratio, they’ll want to check your credit score.
Credit scores can range between 400 and 900. Generally, lenders like to see a score of 700 or above. A high credit score can help you qualify for better interest rates than someone with low or no credit. However, there’s a cap on this, so someone with a credit score of 760 would likely qualify for the same interest rate as someone with a 800, assuming they had comparable financial details.
Canada’s two credit bureaus are TransUnion Canada and Equifax, and they track the credit histories of millions of Canadians. Both will give you a free credit report by mail. Click for instructions on requesting your credit report from TransUnion and Equifax.
If you’re borrowing more than 80 per cent of the home’s value, then you need what’s called an insured mortgage and your credit score is extra important, because lenders view this as a riskier loan. If it’s a conventional mortgage (meaning you’ve put down 20 per cent or more), some banks will look past a less-than-stellar credit score (in even the 600s with a strong application).
If you want a low rate on an insured mortgage, you’ll typically need a minimum credit score of 680. If your score is right at 680, lenders may want you to explain why your credit score isn’t higher (maybe you missed a few bills due to an illness or divorce, or maybe you were out of the country for work). Some lenders do extend mortgages to borrowers with low credit scores, but they’ll typically charge a rate premium and a fee to cover the higher risk associated with the loan.
Even if you already have a mortgage, you’ll want to maintain good credit renewals or refinances. In the case of a refinance, the lender will look at all aspects of your application similar to when you originally applied for a mortgage. For renewals with your current lender, you will usually get offered their renewal rate if you have been paying your mortgage on time. However, if your credit takes a nosedive, your current lender may decide not to renew your mortgage.
Errors do sometimes pop up on your credit report (say you have a common name or you’re the victim of credit identity theft), so I recommend checking your credit report at least twice a year so that you can monitor your accounts, clear up any errors and work on improving your score if you need to.
Here are some tips for raising your credit score before you apply for a mortgage:
- Always pay your credit card bills and loans on time. Late payments can lower your score, so set up auto-payment or put reminders on your calendar if you need those triggers to keep you on track. Excuses like “I never got a bill” or “My cheque must have gotten lost in the mail” generally don’t work with creditors.
- Avoid using more than 75 per cent of your available credit. Using most of your credit limit makes lenders nervous. For instance, if you had a $10,000 credit limit with an outstanding balance of $8,000, it would mean you had charged up 80 per cent of your available credit and lenders might worry that you weren’t managing money responsibly (in that scenario, you would want to keep your balance below $7,500). Even if you pay off the balance every month before payment is due, the balance can still show up on your credit report depending on when the information is gathered.
- Limit your credit applications. Each hard inquiry on your credit (for instance, when you apply for a credit card or an auto loan, or for a mortgage direct through the lender) temporarily lowers your score. However, if you have a mortgage broker checking your file you would only see one hit, even if they’re inquiring on behalf of multiple lenders.
- Pay off any collections actions and send the remediated letter to both credit bureaus. Make sure your credit report is updated and keep a copy of the letter for yourself in case lenders want to see proof that the debt was paid.