We all know that credit plays an important role in whether you qualify for a mortgage or not, but few of us know precisely know what a lender looks for when they look at your credit. If you are applying for a mortgage in Canada, one of the first things they will check is your credit score.
Your Credit Score
Basically, your credit score is a rating system based on how reliable you are as a creditor. Lenders look at your credit score and judge how risky you are if they lend you money. If you have a credit score above 680, they consider you low risk but anything below 600 and they consider you risky. Better interest rates and terms are usually granted to people with higher scores.
How Lenders Check Your Credit
Lenders check your credit score by requesting a credit report from one of the two and credit reporting agencies in Canada, Equifax or Trans Union. Lenders want to see a solid history of borrowing and repaying debt from a variety of sources on the report. Even if you have an average score of around 700, you might not have a reliable repayment history.
Lenders want to see a credit history of at least one year, but preferably two. They also want to see regular payments made on at least two sources of debt. Examples of debt would be a credit card, line of credit or a personal loan. They also want to see a minimum credit score of 600. If you are borrowing your down payment, lenders may bump that up to 650 because of the added risk.
Every Lender Has Different Requirements
It is important to understand that these requirements are not set in stone for all lenders. Different lenders have different criteria for what they consider an unacceptable level of risk. So if one turns you down that certainly does not mean that a mortgage is out of the picture. There are also special programs that can help particular groups to get a mortgage if they have little or no credit, such as new immigrants.
If you don’t have any credit you will want to start to build it now. Getting a credit card, using it for small amounts and then paying the bill off in full is a great way, to start. Paying the bill in full is a strong indicator that you can handle your debt. Some borrowers use two cards that have different due dates and always pay the bill in full each time. This can accelerates your credit history quickly.
Working With a Mortgage Broker
It’s always a good idea to speak with a mortgage professional well before you start shopping for a home. They have industry knowledge and access to many different lenders. If you apply at your bank, you must fulfill their criteria to qualify or you are out of luck.
A mortgage broker can pull a report for you and help you to figure out who will lend to you and what you can do to improve your credit. You want to have someone on your side when you are looking for a mortgage because credit scores don’t always give you the whole picture. These mortgage professionals receive compensation from the lenders when they qualify appropriate buyers. Therefore, there is no fee for you to pay. They can help you to pre-qualify for a mortgage so when you do find something you like you aren’t faced with a surprise on your credit report or a big fat no from the lender. Mortgage professionals make sure that you have one less thing to worry about when you’re shopping for a home.
Have a question about what credit score is needed for a mortgage in Canada and how to qualify? You can contact us here and speak to one of our mortgage professionals today.