Getting approved for a mortgage these days can be a real challenge, especially with housing prices constantly on the rise. In Toronto, for instance, you’ll be paying over $820,000 for a home, which is nearly $100K more than the average price the year before.
Unless you’re rolling in cash, that’s a lot of money to have to come up with in order to purchase a home. Moreover, a lot goes into getting a mortgage. Lenders look at a number of factors when they’re assessing a borrower for a mortgage such as a sizeable down payment, a good income and, of course, a favourable credit score.
A high credit score, in particular, will not only get you approved for the mortgage but a favourable interest rate as well. Being that credit scores are such a significant part of the lending process, it’s no wonder that we get so many inquiries about what qualifies as an acceptable score in terms of getting approved for a mortgage.
What Qualifies as a Good Credit Score?
For those who aren’t as familiar with their credit score, it’s a three-digit number that encompasses all your credit-related activity into one cumulative average. In Canada, credit scores range anywhere from 300 to 900. The higher your credit score is, the better your chances are of getting approved for various loans and other credit products. Generally speaking, a score of 650 and above is considered good and means that you are a low default risk and a better candidate for lending. A credit score of 750 or higher is deemed excellent.
Credit Score Requirements For a Mortgage in 2020
Going into 2020, the minimum credit score needed to get approved for a mortgage is 640, though it would be more accurate to say that anywhere between 620 and 680 would be considered a minimum, depending on the lender. But it should also be noted that the credit score required to get approved for a mortgage in 2020 also depends on several other factors associated with the borrower. For example, a borrower with a high income and low debt amount might be able to get away with a slightly lower credit score than a borrower with a lower income and lots of debt.
Also, the loan amount required and the amortization requested will also play a role in the credit score required for mortgage approval. For instance, a higher loan amount would be considered a riskier endeavour for lenders, who may, in turn, require a higher credit score. Borrowers will also have to undergo a stress test during the mortgage approval process. In order for applicants to qualify for a home loan in Canada, they will have to prove to their lender that they’re capable of affording their mortgage payments into the future if interest rates rise, which they likely will.
Learn more about the mortgage stress test, here.
What Else Do Lenders Look at When You Apply?
As we mentioned, your credit score is not the only factor lenders examine before they approve or decline your application. They also want to see a favourable history of debt management on your part. This means that on top of your credit score, lenders are also going to pull a copy of your credit report to examine your payment record. So, even if your credit score is above the 600 mark, if your lender sees that you have a history of debt and payment problems, it may raise some alarms and cause them to reconsider your level of creditworthiness.
Other aspects that your lender might look at include, but aren’t limited to:
- Your income
- Your employment record
- Your general expenses
- The amount you’re planning to borrow
- Your current debts
- The amortization period
This is where the new stress-test will come into play for all potential borrowers. In order to qualify, you’ll need to prove to your lender that you’ll be able to afford your mortgage payments in the years to come.
They’ll also calculate your monthly housing costs, also known as your gross debt service ratio, which includes your:
- Potential mortgage payments
- Potential property taxes
- Potential cost of heating and other utilities
- 50% of condominium fees (if you’re buying a condo instead of a house)
This will be followed by an examination of your overall debt load, also known as your total debt service ratio, which includes your :
- Credit card payments
- Car payments
- Lines of credit
- Spousal or child support payments
- Student loans
- Other debt
A good way to know if you’ll receive mortgage approval before you actually apply is to get pre-approved, which most potential homeowners will do 60-120 days before they plan to purchase a home. This is when your lender examines your financial records to determine the maximum amount they would grant you, as well as the interest rate they would give you once you’re approved. A pre-approval will also provide you with a better idea of what your future mortgage payments will look like, as well as how your finances will be affected by your down payment, closing, moving, and future maintenance costs.
For the purpose of the pre-approval process, you’ll need to provide your lenders with various documents, such as:
- Proof of identity and residency
- Proof of employment (salary/hourly rate, time and position at the company, etc.)
- If self-employed, Notices of Assessment from the Canada Revenue Agency from the past two years
- Proof that your finances are suitable enough to afford future payments
- Information pertaining to your assets (vehicle, other property, etc.)
- Information pertaining to your current debts and other financial obligations
One important thing to understand here is that the pre-approval is optional and does not actually guarantee that you’ll be approved for the amount you’re pre-approved for in the first place. In fact, even if you’re pre-approved, you still might not be officially approved for a mortgage when you apply. The pre-approval process is simply a way of understanding the debt you’ll be taking on and determining whether you’ll be able to handle the financial strain a mortgage puts you under. It’s also a way of knowing your true price range and showing your lender that you are serious about buying a home.
For more information about mortgage pre-approval, you can visit the Government of Canada website.
Can I Get a Mortgage if My Credit Score is Low?
When we talk about minimum credit scores required to get approved for a mortgage, we’re talking about conventional lenders, such as big banks. These traditional lenders are usually quite stringent about their mortgage approval requirements, including the credit scores needed for mortgage approval.
There are options for bad credit borrowers who are looking for a mortgage to finance a home purchase. Credit unions, trust companies, and subprime lenders are potential sources for mortgages for borrowers who can’t qualify with their banks because of their sub-par credit scores. These sources often deal with people who may be viewed as risky to conventional lenders.
Have you considered a bridge loan to help purchase the home of your dreams?
It should be noted that if you do plan to apply for a mortgage with one of these lenders with a bad credit score, you will likely pay a higher interest rate than you would if you had a higher credit score and applied with a conventional lender.
That’s why it’s best to consider taking the time to improve your credit score before applying for a mortgage. That way you’ll have an easier time getting approved for a home loan and clinch a lower rate, which will make your mortgage less expensive.
How to Improve Your Credit Score
So, it’s clear that a good credit score is one of the more important factors when trying to gain mortgage approval. Since it’s also a factor in calculating the interest rate you’ll be given, a favourable score can also save you thousands of dollars over the course of your amortization. Therefore, it’s best to get your credit score in the best shape you can manage before you apply with any lender. If your score is lower than 600-650, or you would simply like to improve it as much as possible, there are a few simple tricks you can use.
- Paying bills on time and in full
- Do not carry a large amount of unpaid debt
- Use no more than 30% of your available credit card limit
- Don’t apply for too much new credit in a short amount of time
- Review a copy of your credit report for mistakes or signs of identity theft
- Consider a secured credit card if you’re building from the ground up
Finding The Right Mortgage
As we said, if your credit score is below your lender’s standards, it’s possible that your first mortgage application won’t be approved but, don’t give up right away. If everyone with a score under 680 got rejected for mortgages, the population of homeowners in most cities would be sparse, to say the least. That being said, before applying for a mortgage with any lender, it’s best to improve your credit score as much as you can, since doing so will help you gain access to better interest rates.
Remember, applying for a mortgage is the same as for any other credit product, in the sense that the lender will have to make a hard inquiry on your credit report, causing your score to drop a few points. So, when you’re starting to get serious about buying a house, make sure to do some research in advance to find the best lender for your specific financial needs. Loans Canada can help match you with a mortgage product that meets your needs, regardless of your credit.