The Impact of Credit Scores on Mortgage Rates

One of the key factors lenders consider when evaluating a mortgage application is your credit score. Indeed, applicants with medium to excellent credit scores typically benefit from lower interest rates, more flexible terms and conditions, and an easier application process overall. Having a good credit score in Canada is paramount to securing the best mortgage loan possible—yet, there are still ways to get a mortgage if your credit history is subpar. Let’s take a closer look at the impact of credit scores on mortgage rates and overall mortgage approval chances.

How Does My Credit Score Impact My Mortgage Rates?

Generally speaking, applicants with higher credit scores receive mortgages with lower interest rates. This is because issuing mortgages presents a certain risk to the lender. Just like you wouldn’t lend money to a complete stranger, a lender will want to review your credit background before approving your mortgage application. A clean credit history and a good credit score demonstrate to lenders that you consistently manage your financial obligations effectively. This reliability suggests that you will likely manage your mortgage payments with similar competence. As such, lenders are willing to extend loans with better terms and conditions to borrowers who can flaunt higher credit scores.

Other Factors Lenders Consider When You Apply for a Mortgage

Aside from your credit score and history, the lender will use the following factors to evaluate your creditworthiness and, therefore, the risk associated with issuing a mortgage to you.

• Debt-to-Income Ratio: The debt-to-income ratio represents the relationship between all your existing debt payments and your monthly income. This value gives lenders an insight into how well you’ll be able to manage your mortgage payments while also repaying the other outstanding debts you have.
• Down Payment: In simple terms, the larger the down payment you have, the less money you will be borrowing, and the less risk you will present to the lender. In addition, the size of your down payment will determine whether you will be required to purchase CMHC insurance.
• Employment History and Income: Employment history and income are key factors lenders look at when determining your eligibility for approval. A steady record of employment with reliable and predictable income shows the lender that you are equipped to make your regular mortgage payments on time.

The Importance of Good Credit 

Among other factors lenders consider when evaluating mortgage applications, good credit is key in determining the final mortgage rate you will be offered. It may even make or break the deal, determining your overall eligibility for approval—plus, it may place you into either the “A borrower” or the “B borrower” bucket. A-type borrowers are considered low-risk and are more likely to get approved by traditional lenders.

What is a Good Credit Score in Canada?

According to Equifax, credit scores from 660 to 724 are considered “good” in Canada, with credit scores from 725 to 759 classified as “very good.” If you can flaunt a credit rating of 760 or higher, congratulations! Your credit is “excellent.” Note that the average Canadian has a “good” credit score of around 680.

What Credit Score is Required for a Mortgage?

While some mortgage providers will extend loans to applicants with credit ratings between 600 and 680, the minimum credit score required for a mortgage with good rates is 680. 

How Do I Find Out My Credit Score?

The most accurate way to find out your credit score is to request your credit report from Equifax or TransUnion. Doing so will have no negative impact on your score and will provide you with valuable information about your credit, as well as an opportunity to check the report for errors. 

To see your credit report, you can either access it online at no charge, order it by phone or by mail, or request it in person. While reviewing your report, ensure that all the information is checked for accuracy and ask for any errors to be corrected immediately.

How Do I Improve My Credit Score?

If your credit score needs work, don’t despair! There are simple ways to improve it. It’s best to begin your efforts at least several months before you apply for a new mortgage or a mortgage renewal. As such, pay attention to:

• Always make payments on time
• Use no more than 30% of the total available credit at any time
• Regularly check your credit report for errors and correct them
• Limit the number of new credit applications
• Do not close old credit accounts
• Diversify your credit with various types of loans and accounts

Can You Get A Mortgage With Bad Credit?

Having a less-than-ideal credit score or credit history does not automatically prevent you from getting a mortgage. A low credit score may simply mean that you will face higher fees, interest rates, and possibly stricter conditions. To reduce the risk associated with lending money to you, you may be required to increase the down payment amount or get a co-signer or a guarantor for the loan. 

Another option is to work with an alternative or private lender. Such lenders have more relaxed qualification criteria and are willing to accept applications from borrowers with subpar credit scores. However, be prepared to pay considerably higher interest rates and fees.

Getting Your Mortgage

Without a doubt, having a good credit score in Canada is key to securing the best mortgage rates possible. However, whether you have a good credit score or a bad one, know that you can get a mortgage—especially when working with an experienced mortgage broker like myself. Get in touch with me, and I would be happy to discuss your financial situation to find the best mortgage option for your needs.