12 Sep Importance of Credit Scores in Mortgage Approval in Canada
Have you moved to Canada and feel excited to call it, your home?
Whether you are settling into the vibrant streets of Toronto, the serene landscapes of Vancouver or the historic charm of Quebec City, there is a lot to look forward to. Among the many facets of your new life, securing a place to live is likely a top priority. If you have ever tried to open a line of credit with your bank, apply for an auto loan, or sign up for a mortgage, you have probably heard the term credit score before.
Wondering about the intricacies of credit scores and how they impact your mortgage approval? You are in the right place. This blog will dive into the importance of credit scores in Canada, particularly in the context of mortgage approvals, and provide you with the information you need to navigate the Canadian financial landscape.
What is a Credit Score?
A credit score is a numerical measure of your creditworthiness, acting like a report card for your financial behaviour in Canada. Scores range from 300 to 900, with higher numbers indicating better creditworthiness. Factors such as payment history, amounts owed, credit history length, types of credit used, and recent inquiries determine this score.
According to the Government of Canada, it reflects how likely you are to pay bills on time, indicating your reliability as a borrower. Higher scores increase approval chances for loans and larger purchases like homes, often with better interest rates. Equifax and TransUnion, Canada’s main credit bureaus, track and assess your credit activity to calculate your score, crucial for lenders assessing your creditworthiness.
Understanding Credit Scores in Canada
In Canada, your credit score, ranging from 300 to 900, plays a crucial role in determining your financial opportunities. According to Equifax, a good credit score typically falls between 660 to 724, while scores from 725 to 759 are considered very good, and 760 and above are excellent. These scores reflect how likely you are to manage credit responsibly, influencing your ability to secure loans, credit cards, and favourable interest rates.
It is important to note that credit scores fluctuate based on individual financial behaviours and debt management, making regular monitoring and responsible financial habits crucial for maintaining or improving your score over time.
A strong credit score is not just a badge of financial responsibility. It is a gateway to financial opportunities. Whether you are applying for a mortgage to settle into your new Canadian home, seeking financing for a vehicle, or applying for a credit card, a higher credit score increases your chances of approval.
Moreover, it can lead to more favourable interest rates and terms, potentially saving you thousands of dollars over time.
Factors Affecting Your Credit Score
Credit scores are calculated using five common factors in Canada.
- History of Payments: Timely payments boost your credit score, while late payments can significantly lower it.
- Credit History: The length of your credit history impacts your score, a longer history is always better.
- Debt-to-Credit Ratio: This is the amount of credit you are using compared to your total available credit.
- New Inquiries: Frequent credit checks can lower your score slightly.
- Public Records: Bankruptcies, liens, and other public records can negatively affect your score.
Minimum Credit Score for a Mortgage
If you are wondering, “Can I buy a house with a 630-credit score?” the short answer is likely no. You will typically need a credit score of at least 680 to get your foot in the door.
But here is the exciting part. A credit score of 720 or above can unlock the best mortgage rates, potentially saving you thousands over the life of your loan.
Imagine the thrill of not just getting approved for your mortgage but also securing those coveted low-interest rates. The latest FICO report from April 2023 reveals that the average Canadian borrower boasts a credit score of 762, showcasing the potential for financial success.
What Else Do Lenders Look At?
When applying for a mortgage, lenders consider several factors beyond your credit score.
- Employment Records: Stable job history is essential for demonstrating reliable income.
- Desired Mortgage Amount: The amount you want to borrow should be reasonable compared to your income.
- Monthly Housing Costs: Lenders assess if you can afford monthly payments, including taxes and insurance.
- Stress Test: To ensure you can handle future financial changes, lenders will conduct a stress test. They will calculate whether they would still approve your mortgage at an interest rate of either 5.25% or your potential rate plus 2%, whichever is higher. This helps protect you from potential rate increases in the future.
Fixed-Rate Vs Variable-Rate Mortgages
In Canada, you can choose between fixed-rate mortgages and variable-rate mortgages. A fixed-rate mortgage has a constant interest rate for a specified period, providing stability and predictability in your payments.
A variable-rate mortgage, on the other hand, has an interest rate that can fluctuate based on market conditions, which might be lower initially but can increase over time.
Mortgage Terms and Amortization Period
In Canada, you can choose a closed or open mortgage term. Terms can range from two years to five years or more, depending on the mortgage lender. A five-year fixed-rate mortgage is the most popular term.
On the other hand, amortization period is the total time it will take to pay off your complete mortgage debt including interest, based on regular payments at a certain interest rate. Common amortization periods in Canada are 10, 20, and 25 years.
Can I get Mortgage with a Low Credit Score?
Yes, you can apply and get an approval for a mortgage with a low credit score, but it may be more challenging. Here are some tips to improve your chances.
- Alternative Lenders: Consider non-traditional lenders who might be more flexible with their criteria.
- Larger Down Payment: Offering a higher down payment can offset a low credit score and make you a more attractive borrower.
- Co-Signed Mortgage: Having a co-signer with a good credit score can significantly boost your approval chances.
- Improve Your Credit: Take steps to improve your credit score by paying bills on time, reducing debt and correcting any errors on your credit report.
It is also helpful to consult with a mortgage specialist to explore your options and find the best path to homeownership despite having a low credit score.
Whether you are new to Canada or a long-time resident, knowing the importance of credit scores empowers you to make informed decisions on your journey to owning a home. By cultivating healthy financial habits and exploring options to strengthen your creditworthiness, you pave the way for a smoother and more rewarding path to your dream home.