In Canada, to be sure of getting a mortgage you must have a good credit rating. But what credit rating do you need to buy a home in Canada?
What is the credit score?
The credit score, a critical component of your loan application, is a 3-digit score assigned to you by a credit reporting agency, such as Equifax or Transunion. This credit score is used to assess the likelihood that you will pay your bills on time and meet your obligations.
Having a good credit rating is essential for building the confidence of financial institutions and for your financial security.
The credit score determines the bank’s level of risk in accepting or refusing financing.
Above a credit score of 680, it will generally be possible to obtain the best loan conditions. However, it is possible to obtain financing with a lower score.
Banks apply internal criteria when deciding whether to grant or deny a credit application. If accepted, this means that the bank believes the applicant will be able to repay the loan. The credit score, also known as the credit rating, determines your ability and reliability to repay your debts.
What is the minimum credit score for a mortgage in Canada?
In Canada, to be sure of being approved for a mortgage, your credit score must be close to 900.
However, you must have a minimum credit score of 620 to purchase a home, and ideally 680 or higher.
If your credit score is below 620, we invite you to discuss it with our mortgage brokers who will be able to advise you on how to obtain a mortgage loan.
How does credit score affect the application for a mortgage to buy a home?
Mortgage Eligibility
A credit score is essential for a mortgage application because lenders analyze your credit score to determine your eligibility for a mortgage.
Credit scores above 680 are considered good credit.
A good credit score allows you to obtain a favorable interest rate
Your credit score also allows you to take out a mortgage loan at a more advantageous interest rate.
When the credit score is low, 620 and below, some banks offer solutions with higher interest rates.
As a general rule, a high score allows access to good rates for buying a home.
If you have a credit score over 680, then you should be able to access better interest rates.
Other factors
Your credit score is a critical element in the eligibility of your mortgage application.
However, lenders also consider other factors besides your credit score when buying a home, namely:
- The amortization period of your debt
- Your debt to income ratio (GDS-TDS)
- The amount of your mortgage
- Validation of your employment (permanent position, guaranteed hours), or confirmed self-employed income (average 2 years)
- The purpose of your home purchase
- Your debts (no late payments)
- The amount of your monthly payments (which affect your debt ratios)
How to get a good credit score to buy a house?
There are several ways to increase your credit score to buy a home:
- Define your budget
- Pay off your credit card and avoid exceeding 60% of your credit card limit
- Pay your bills and credit cards on time
- Never exceed your credit limits
- Check your credit report to make sure there are no errors
- Vary the types of loans (credit card, car loan, or line of credit)
- Avoid applying for too many loans in a short period of time
- Maintain financial stability by meeting your commitments
Factors that determine your credit score for a mortgage
Here are 5 factors that determine your credit score for your mortgage:
Payment History
Your payment history helps demonstrate to the lender your ability to pay your debts and credit card bills on time.
Credit history
Your credit history reveals how long you have had credit accounts. The longer the length of time, the more advantageous it will be for your mortgage application.
Use of your credit
Ideally, you should use 35% of your credit. Otherwise, never exceed 60% of your credit limit.
Types of credit in progress
What types of credit do you have? We recommend that you have a credit card as well as a line of credit.
New credit applications
The lender checks to see if you have made any new loan or credit card applications and how often.
How to get the best mortgage rates?
Improve your credit score
Your credit score is the most important element that influences your mortgage rates. Before you apply for a mortgage, we recommend that you improve your credit score. The higher your score, the lower your mortgage rates.
Down payment
The amount of your down payment also influences your mortgage rates. The larger the down payment you make, the better the interest rate you can get.
Mortgage Terms
In Quebec, you can opt for an open or closed mortgage term.
If you choose an open mortgage term, there will be no prepayment charge, but the interest rate will be higher.
If you choose a closed mortgage term (usually between 1 and 5 years) , you will have to pay prepayment penalties if you pay out before the term.
We advise you to contact our mortgage brokers who will help you choose between an open and closed mortgage term.
Depreciation
The amortization period is the period of time over which you must repay your mortgage. Amortization periods in Quebec are generally between 25 and 30 years, but some alternative lenders allow for longer amortization periods: 35 and 40 years.
The longer your amortization period, the lower your monthly payments will be, but the more interest you will pay over the term.
If you choose a shorter amortization period, your monthly payments will be higher but the total amount of interest paid will be lower because your loan will be paid off faster.
We advise you to contact our mortgage brokers who will help you choose your amortization period.
Fixed or variable rate mortgage?
Which should I choose, a fixed or variable rate mortgage?
We advise you to carefully evaluate your financial situation, your risk tolerance and your financial priorities.
If you prefer to have stability in your payments and to respect your budget, we advise you to opt for a fixed rate.
If you want to limit mortgage penalties, and you think that the Bank of Canada’s key interest rate could go down, we advise you to opt for the variable rate.
However, every situation is different. The best thing for you to do is to discuss it with one of our mortgage brokers to determine which rate is best for you.
Minimum credit score for a mortgage – FAQ
How do I know my credit rating?
You can check your credit score online with the credit bureaus Equifax and TransUnion Canada. Some banks may offer an in-house scoring service to complement Equifax or Transunion.
Is it possible to get a mortgage with bad credit?
It is possible to get a mortgage with bad credit, solutions with alternative banks exist, the down payment required is at least 20%, the interest rates will generally be higher.
In an ideal situation, we still advise you to take care of your credit score to have a minimum score before applying for a mortgage loan, we can help you understand the factors that could help you raise your score in preparation for a purchase.
What if your credit score is too low to buy a home?
The solutions to getting a mortgage with a low credit score are to :
- Make a higher down payment (20% and more)
- Bringing in equity from a mortgage refinance ,
- Go through a private or alternative lender
- Improve your credit rating
- Demonstrate financial stability
Make an appointment with our team to guide you and get personalized advice to improve your credit rating.
