One of the things lenders consider when deciding whether or not you are a good candidate for a mortgage loan is your credit score. Your credit score is a measure of your financial health, and shows lenders their level of risk if they lend you money.
Your credit score is a number between 300 and 900. A credit score above 700 proves you manage your credit well, meaning a lender should feel comfortable letting you borrow money. A lower credit score shows that you have mismanaged your credit, making you more of a risk to the lender, which means you may be required to pay a higher mortgage rate.
Your credit score is built and tracked based on information sent to credit-reporting agencies – more commonly known as credit bureaus – by companies that lend you money or issue you credit cards, such as banks, retailers, credit unions and other financial institutions. There are two credit-reporting agencies in Canada: Equifax Canada and TransUnion. Upon request, both agencies will send you one free copy of your credit report each year, as well as allow you to look up your credit score at any time for a small fee. It’s a good idea to check your credit report annually, to make sure there are no mistakes on it.
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Factors that influence your credit score
Each credit-reporting agency uses their own proprietary formula to calculate credit scores. Your credit score is calculated based on the following factors:
- Past Payment History – Late or missed payments, overdue accounts, bankruptcies, and any written off debts will all lower your credit score
- Credit Utilization – How much debt you have as a percentage of your available credit will also affect your credit score (You should try to use less than 35% of your available credit)
- Credit History – How long you’ve had accounts open (the longer, the better)
- New Credit Requests – How recently and how often you’ve applied for new credit (checking your own credit score will not affect your score)
- Types of Credit – Having a mix of credit is best, such as a credit card, an auto loan and a line of credit
How your credit score affects your mortgage
Your credit score is important, because it affects which lender you can get your mortgage from and what your interest rate on that mortgage will be. Prime lenders, such as major banks, will definitely give you a mortgage if your credit score is above 700, and they will consider applications with credit scores between 600 and 700.
If your score is between 600 and 700, the rest of your application will need to be strong in order to get approved. The lower your score, the greater risk you pose to the lender. To compensate for that risk, some lenders, such as trust companies and private lenders, will charge you a higher interest rate. Some lenders won’t lend you money at all if your credit score is too low.
Here is a table showing which lenders you can get a mortgage from in different credit score range scenarios.
|Description||Credit Score1||Mortgage Rate2||Example lender|
|Major Banks - Prime Lenders||Financial institutions including the big banks with more conservative lending requirements||600-900||3.49%||TD Canada Trust|
|Trust Companies - Bad Credit Institutional Lenders||Financial institutions catering to those with bad credit||550-700||5.49%||Home Trust|
|Private Lenders||Private companies or individuals who loan funds by real estate properties||Less than 600||10-18%||Wealthbridge|
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How to improve your credit score
If you have a bruised credit score, or you’ve recently moved to Canada and would like to establish credit, here is a list of things you can do to improve your credit score:
- Make sure to have a least two credit facilities in use at all times. Use each credit facility every month, and pay off the balance.
- Always make your payments on time, and always pay at least the minimum payment. If you can’t make the minimum payment, let your lender know right away, as they may be able to accommodate you by extending your payment due date.
- Do not to use more than 35% of your available credit. For example, if you have a credit card with an available limit of $5,000 and a line of credit with an available limit of $9,200, try not to borrow more than $4,970 ($5,000 + $9,200 x 35% = $4,970) at any given time.
- Establish a long credit history. Try not to cancel your oldest credit card, even if you rarely use it. The longer your credit history is, the better your credit rating will be.
- Limit how frequently you apply for credit. The more times you apply for new credit, the worse it looks to lenders. Note that checking your own credit will not affect your credit score.
References and Notes
- Two clients with the same credit score may not qualify with the same lenders. In addition to credit score, lenders will look at income, debt obligations and equity in property, as well as the property itself.
- Mortgage rates listed are examples of 5-year fixed rates and may change at any time.