Getting approved for a mortgage these days can be a real challenge, especially with housing prices 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 in 2021! What many don’t realize is that a credit score is a significant factor in the lending process. A high credit score will not only help you secure a mortgage, but it can also help you win a favourable rate. Let’s dig deeper into the mortgage and credit score connection.
How does a credit score impact my mortgage qualification?
Your credit score is one of the main ways that lenders will vet applicants on their creditworthiness. A good score tells lenders that you pay your bills on time; the higher your score, the more likely they will be to work with you. Credit scores are set in ranges. Although different sources may set their ranges slightly different, here’s a breakdown of each level from borrowell.com, so you can see how they are categorized:
- A score of 741+ is considered “excellent” and you can expect to qualify for the best rates.
- A score between 713 and 740 is “very good” and can expect approvals to the lowest rates.
- Between 660 and 712 is a “good” credit score and will qualify for a mortgage. However, not at the same low rates offered to those with 660+.
- At 575 to 659, this “fair” rating will allow those with 620+ to qualify with a traditional bank.
- 300-574 is deemed to be a poor credit score, and will be considered “high-risk”. You may have to apply to a private mortgage lender who will charge higher interest rates.
DYK: For every 20-point increment that your credit score drops, you’ll likely see small changes in the interest rate you’re offered. Lenders typically adjust their offer rates each time your credit score moves up or down by 20 points.
What credit score do I need to secure a mortgage?
In 2022, the minimum credit score you will need to have to obtain a mortgage is 640. However, depending on the lender, you might be considered with a score within the range of 620 to 680. But credit scores alone aren’t the determining factor. If you were to have a high income and low debt amount, you might be able to qualify with a slightly lower score. Having a low income and high debt ratio will make it much more difficult. According to loanscanada.ca, the loan amount required and the amortization requested will also play a role in the credit score required for your mortgage approval. The amortization period is the amount of time the lender will give you to fully repay your mortgage. For a higher loan amount, lenders may require a higher credit score because they will be concerned about the level of risk.
Factors considered by mortgage lenders
Besides your credit score, mortgage lenders consider a variety of factors before they approve or decline your mortgage application:
- Your income
- Your employment record
- Your general expenses
- The amount you’re planning to borrow
- Your current debts
- The amortization period
Lenders also want to see that you have a favourable history of debt management. Your credit report will also be requested, as it shows your history of payments. Therefore, even if you have a credit score of above 650, some red flags may be raised if you show a pattern of debt and payment problems on your report.
Home Insurance and Credit Scores
In Ontario, there are restrictions for using credit scores to affect car insurance rates, there are no such restrictions for home insurance.
Insurers are allowed to use your credit history to determine your premium. According to a report done by CBC-TV’s Marketplace in some cases, this has resulted in a homeowners’ premium doubling after insurers have found out that the policyholder has a poor credit score. Unfortunately, there’s no recourse for when this happens. Insurance companies have long maintained that there is a strong correlation between credit scores and increased insurance risk. However, some critics argue that using credit history is unfairly punishing newcomers to Canada, the poor and the disabled. Because Canada’s regulations on this differ from province to province, you should ask your insurer whether they are using your credit history to determine your insurance premium. That can help you understand why the price you’re paying may be too high.
Credit scores and default insurance
Your credit score also affects your eligibility to receive mortgage default insurance. For buyers, putting less than 20% down on their mortgage loans means they will be required to get mortgage insurance. This measure is put in place to protect lenders from defaulting loans. This is also why, according to the Canada Mortgage Housing Corporation, you’ll need a minimum credit score of 600 to receive insurance.
Ways to obtain a mortgage with bad credit
Although a bad credit score can limit your ability to qualify for a mortgage, you may still have options:
- Improve your credit score: The smart choice is to hold off on applying for a mortgage and try to improve your credit score. By doing this, you will not only qualify for a mortgage, but be offered better options.
For tips on how to improve your credit score, click here.
- Make a larger down payment: Putting down 20% or more allows you to have more leverage when working with lenders. It can also help reduce your mortgage payments.
- Use an alternative mortgage lender: Major banks will not lend money to those with a credit score of below 600. They will require a down payment of 20-35%, and your interest rates will be higher. In addition, extra fees are tacked onto the overall cost; anywhere from 1-2% of your mortgage’s value.
- Get a co-signer or a joint mortgage: A co-signer promises to make your payments if you’re not able to. They can make it easier to apply to traditional lenders because they are putting up their credit history and income to help you qualify.
The mortgage approval process can be complicated, but having a strong credit score can give you more options. The mortgage and credit score connection is an important consideration when lenders are determining if you will qualify. Before undergoing the stress test that occurs during the mortgage approval process, get in touch with one of our isure representatives to discuss how homeowners insurance can protect your investment.
