What Credit Score Do You Need for a Mortgage?
Jan 21, 2021 • 10 min read
To qualify for the best available mortgage rates, it’s important to have a strong credit score. A credit score of 680 or above is required to qualify for the best mortgage rates in Canada in 2021. Some mortgage providers allow you to qualify with credit scores between 600 and 680, but these providers may charge higher interest rates.
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You may be wondering why lenders in Canada care so much about your credit score. Mortgages represent a large sum of money for lenders. Just like you wouldn’t lend money to a complete stranger, a lender isn’t going to lend you a large sum of money without vetting you first. Your credit score is one of the main ways that lenders vet you for your creditworthiness.
A good credit score shows lenders your ability to pay bills on time. The higher your score, the more likely that lenders are willing to work with you. A good credit score can also help you qualify for better mortgage rates, which will help you save more money on your mortgage payments. The interest rate you receive on your mortgage matters, as even a slightly lower interest rate can have a major impact on what you pay in interest.
What should my credit score be to get the best mortgage rates?
Here’s a brief overview of what your credit score looks like to lenders and mortgage brokers. The higher your credit score, the better rates you can qualify for.
741 or more: Wow – your credit score is excellent! This is where the best mortgage rates live.
713 to 740: You have a good credit score. You should receive a very good interest rate on your mortgage and have plenty of options.
660 to 712: This is considered a fair credit score by lenders. However, once you get to 660, you’ll be entering average credit score territory.
575 to 659: In the eyes of banks and lenders, this is a below-average credit score. If your credit score is below 640, you might have trouble getting a conventional mortgage from a bank or online lender. Consider working on improving your credit score before applying for a mortgage.
300 to 574: Your credit score is poor and needs improvement, but that’s OK. As your credit stands right now, you’d be considered a high-risk borrower. Even if you’re approved for a mortgage, you would end up paying extremely high interest rates. You should make an effort to improve your credit score in order to access better mortgage rates in the future.
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.
Not sure how your credit score stacks up? You can get your free credit score from Borrowell and see what mortgage rates in Canada you qualify for. You can get instantly matched with mortgage lenders that match your profile.
How do I get a mortgage if I have bad credit?
Bad credit can limit your ability to get a mortgage. You may have options available to you, but the interest rates you’ll qualify for won’t be cheap. If you don’t want to put off purchasing a new home, there are immediate steps you can try taking to get a mortgage with bad credit. If you’re willing to wait, you should take time to improve your credit score and qualify for better mortgage options. Here are ways you can get a mortgage with bad credit.
Make a larger down payment
If your credit score isn’t great, there are other ways to demonstrate your financial stability to lenders. Making a large down payment of 20% or above provides you with more leverage when working with lenders. It shows that you have a sizeable income and demonstrates your budgeting skills. It will also help you reduce your regular mortgage payments, making them more manageable in the long-run. In short, a larger down payment will often make you a more attractive borrower to mortgage lenders.
Use an alternative mortgage lender
If your credit score falls below 600, you will have a very difficult time getting approved from Canada’s major banks. You’ll more than likely have to work with an alternative lender.
Alternative lenders are more lenient when it comes to credit. However, you’ll usually need to make a heftier down payment of between 20% and 35%. Interest rates also tend to be higher with alternative mortgage lenders.
Alternative lenders may charge additional fees that traditional lenders don’t. For example, an alternative lender might charge a loan processing fee of 1% of your mortgage’s value. If you found this alternative lender through a specialized mortgage broker, the broker might also charge you a finder’s fee of 1%. This additional 2% in fees can be a substantial cost; for a $300,000 mortgage, this amounts to an additional $6000 cost.
Get a co-signer or a joint mortgage
If you want to get a mortgage now without increasing your down payment or working with alternative lenders, you could get a co-signer. A co-signer promises to make your mortgage payments if you’re not able to. A co-signer makes it easier to qualify for a mortgage from traditional lenders, since the co-signer’s credit and income are being used for qualification purposes. If you go with the co-signer route, you’ll want to choose someone with good credit, good income, and not a lot of debt who’s willing to co-sign for you.
Improve your credit score
If you aren’t in a rush to buy a new home, you should take steps to improve your credit score. In general, you can do this by paying your bills on time, trying to not use more than 30% of your available credit limit, applying for new credit selectively, and not closing old credit accounts. By consistently taking these general steps, your credit score should start to improve in the coming months. If you have a zero credit score, here are specific steps you can take to build credit history.
Credit scores and mortgage default insurance
Your credit score also impacts your ability to get mortgage default insurance, which is required if your down payment is less than 20%. Mortgage default insurance protects your lender if you can’t make your mortgage payments. In July 2021, the Canadian Mortgage and Housing Corporation (CMHC) changed their minimum credit score requirement for mortgage default insurance from 680 to 600.
Mortgages insured by private insurers may not have as strict credit score requirements as the CMHC. These mortgages may have higher interest rates, but you may be able to qualify with a credit score below 680, or even 600.
How do I improve my credit score?
Here’s a more detailed breakdown of steps you can take to improve your credit score and qualify for better mortgage rates in the future.
1. Check your credit score and regularly monitor it
Checking your credit score is the first step to improving your financial well-being. You can use Borrowell to check your credit score for free. Getting a handle on your credit score will help you access better products and get the best interest rates possible. Also, data says that checking your score can actually help you improve it!
2. Watch Your credit utilization
The amount of credit you have available is more important than you might think. Oftentimes, we run up balances on our cards and are unaware of the damages it can cause. Credit utilization is the ratio of your credit card balance to your credit limit as listed on your credit report. You should never use more than 30% of your available credit limit. For example, if you have a combined credit limit of $10,000, keep your total balance under $3,000.
3. Pay your bills on time
Paying your bills on time accounts for 35% of your credit score. It’s the largest factor that impacts your credit score, so it’s important that you stay on top of your regular bill payments. Late or missed bill payments will have a negative impact on your credit score; even one missed bill payment can decrease your score by up to 150 points.
You can use free bill tracking solutions to ensure that you don’t miss any of your bill payments. You can also set up pre-authorized payments on bills that are often reported to credit bureaus. These bills include mortgages, student loans, car loans, credit cards, utilities, cell phone bills, insurance premiums, etc.
Besides credit scores, what else do mortgage lenders look at?
Your credit score is a main factor that lenders look at when qualifying you for a mortgage, but it’s not the only one. Other factors mortgage lenders consider when approving you for a mortgage include:
Your employment (salaried vs. hourly wage vs. self-employed)
Your payment history
Your financial history
How much you want to borrow
The property itself
Mortgage lenders don’t want you to have any prior bankruptcies or consumer proposals within the last 24 months. They also don’t want to see any 60-day overdue payments on your credit report within the last 24 months.
Two key areas that mortgage lenders assess are the monthly living costs for your potential new home and your current sources of debt.
Your monthly living costs, aside from mortgage payments include:
Your current sources of debt include:
Credit card payments
Car loan payments
Student loan payments
Open lines of credit
You’ll also need to pass the mortgage stress test. The mortgage stress test proves to the lender that you can afford higher mortgage payments if and when higher mortgage rates arrive.
A mortgage lender will take all of these factors into account when deciding whether to approve your mortgage application. You don’t have to be perfect, although if you’re strong in all or most of these areas, it can help make the mortgage approval process go much smoother.
It’s a good idea to get pre-approved with a mortgage broker before looking at properties. If you’re not qualifying for the purchase price that you want, the mortgage broker can make suggestions to help you qualify, such paying down debt or bringing on additional income via a co-signer.
Finding the best mortgage for you
Now that you know what credit score you need to get the best mortgage rates and how to improve your score, you should be well on your way to getting the best mortgage rate. But how do you find the best mortgage for you?
There are a few different routes you can take when looking for a mortgage. You can go to your big bank and choose from the options they make available. You can also opt for a mortgage broker. A mortgage broker is a licensed professional that will compare mortgages on your behalf from a variety of lenders to help you find the best rates available to you.
A mortgage broker can save you time and effort because they have access to many different lenders, including the major banks, credit unions, alternative lenders, and private lenders. They can compare lenders and look for the most competitive mortgage rates without being obligated to pick from any singular lender.
You can also Borrowell to find and compare the best mortgage rates available to you, based on your credit score. Whether you're a first-time home buyer or looking to refinance your existing loan, you can access your free credit report and instantly see your chances of mortgage approval from lenders across Canada. Our Mortgage Coach tool will look at your credit profile and ask a few simple questions to find and compare mortgage rates from over 50 lenders. Refinancing your mortgage could temporarily lower your credit score, but you can use Borrowell to compare mortgage rates and see your approval chances without hard credit checks from lenders impacting your score.
The Bottom Line
Having a credit score of 680 or above gives you the best shot at qualifying for the lowest mortgage rates in Canada. If your credit score is between 600 and 680, you may still have mortgage options available to you, but they may be at higher rates. If you’re not in a rush to find your new home, we recommend taking steps to build and improve your credit score, especially if you have a zero credit score. By doing so, you can set yourself up powerfully for the future to qualify for the best mortgage rates, save money, and pay off your mortgage sooner.
Author & Mortgage Professional
Sean Cooper is the bestselling author of the book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.