Loan Express does not require credit checks, decline a loan based off a credit check, nor do credit checks affect the minimum approved amount of the loan. The following article is purely for educational purposes.
How Your Credit Impacts Your Mortgage Approval
Have you ever wondered what effect your credit score has on your mortgage? Your credit rating is one of the most critical factors that can influence how much money you pay for a home loan. If you want to improve or maintain a high credit rating, then it’s crucial to know the basics about how your score is calculated and why it matters.
Naturally, the better your credit, the easier the process of acquiring a suitable mortgage will be. Lenders will utilize your credit score as a sign of how well you handle financial obligations. These three digits can be the difference between an approved or a denied mortgage.
Your credit score also affects the mortgage rate and terms of your mortgage. If you have a higher credit score, you may receive a lower interest rate or flexible payment terms.
Credit Score Requirements for a Mortgage in 2021
To qualify for the best mortgage rates in Canada, it’s important to have a good credit score. The average Canadian with a 680+ credit score will pay an interest rate close to 2%. Some mortgage providers allow you to qualify with scores between 600-680 but may charge higher interest rates.
| Good (600-900) | Fair (550-700) | Poor (<600) | |
| 5-Year Fixed Rate | 2.54% | 5.19% | 10-18% |
| Types of Lenders | Major Banks | Trust Companies | Private Lenders |
| Monthly Mortgage Payment* | $2,223 | $2,927 | $4,419 |
How to Get a Mortgage If You Have Bad Credit?
Bad credit can make it difficult to get a mortgage. You may have options, but the interest rates you’ll qualify for will be expensive. If you don’t want to put off purchasing your new home and are willing to wait, try taking time to improve your credit score so you can qualify for a lower interest rate. However, there are ways to get a mortgage if you have bad credit.
Pay a Larger Down Payment
Your credit score may not be the best, but there are other ways to show financial stability. Making a sizable down payment of at least 20% will give you leverage when working with lenders, and it shows that you have a sizable income and demonstrates your budgeting skills. It also helps reduce monthly mortgage payments, making them more manageable long-term, giving you time to improve your credit if possible!
Use an Alternative Mortgage Lender
If your credit score drops below 600, you may not be able to get a mortgage from Canada’s major banks. In this case, you will usually have to work with an alternative lender and make heftier down payments of 20% – 35%. Interest rates are also much higher than those offered by the big Canadian banks.
If your credit score falls below 500 points on one or more scores (out of 850), then it won’t matter if you’re shopping for mortgages in Toronto, Vancouver, Montreal, Halifax, or any other city across Ontario. Chances are very good that you’ll need financing through an alternate provider.
Alternative lenders are also known to charge additional fees, such as a loan processing payment of 1% of your mortgage’s value. Additionally, if you have acquired approval for an alternative lender through a specialized mortgage broker, they may also charge you a 1% finder’s fee which can add up. That would be an additional $6000 cost on a $300,000 mortgage!
Get a Joint Mortgage
If you want to get a mortgage without an increase on your down payment or an alternative lender, consider getting a co-signer. This person promises to make your monthly mortgage payments if needed and can help increase the chances of qualifying for traditional loans by attributing their credit score and income towards qualification requirements.
Improve Your Credit Score
If you are not in a rush to buy a new home, it is best that you take steps now to improve your credit score. There are many things one can do. Here are just a few outlined by the Federal Consumer Agency of Canada:
- Monitor your payment history
- Use credit wisely
- Increase the length of your credit history
- Limit your number of credit applications or credit checks
- Use different types of credit
- Pay your Bills on Time
By consistently taking these measures over the coming months, people have seen an increase in their scores with little effort! Visit our article about how you can improve your credit score for more detailed information.
What Are Other Aspects That Mortgage Specialists Look At?
While your credit score is a main factor in qualifying for a mortgage, it’s not the only thing mortgage lenders consider. They also review:
- Income
- Your employment (salaried vs. hourly wage vs. self-employed)
- Payment history
- Financial history
- How much you want to borrow
- The property itself
Naturally, mortgage lenders will not want you to have bankruptcies, 60-day overdue payments on your credit report, or consumer proposals within the last 24 months.
There are also monthly living costs for your potential new home and your current sources of debt that come into play. Aside from mortgage payment, this can include:
- Property taxes
- Heating
- Condo fees
- Current credit card payments
- Car loan payments
- Student loan payments
- Open lines of credit
You will also need to pass a mortgage stress test, which proves to the lender that you can afford higher mortgage payments. To calculate this, they will take all of these factors into account. While you don’t have to have a perfect record, a clean history will help make the approval process go smoothly. Because of all of the ins and outs that go into the mortgage approval process, it’s smart to get pre-approved before you begin looking for properties. The mortgage broker can then make recommendations to help you qualify, such as paying down debt or utilizing a co-signer.