It's no secret that a good credit score goes a long way to getting the best interest, loan and mortgage rates. Good credit also means getting approved for higher loans, at more competitive lenders and this goes a long way to getting the most flexible, lowest-cost mortgage loan when buying a home.
For current homebuyers, this means starting your home search by checking your credit score, first. If you don't have a good credit score, you'll want to know this sooner rather than later—because there are ways to improve your credit score before you buy a home.
To help, here's a bit of information on the minimum credit score needed to buy a home and some tips on how to improve your credit score, quickly.
What is a Credit Score?
A credit score is a number that tells lenders what kind of consumer you are and have been in the past. The higher the number, the better you've been at paying bills, handling debt and managing your finances.
- Your credit score goes up when you are responsible about how you use credit;
- You lose points if you fail to repay debts or have trouble managing your bills.
In America, the average credit score is 698, according to Equifax.
In Canada, the average credit score is 650, according to Transunion.
What is the Minimum Credit Score Required for a Mortgage?
In America, the minimum credit score for more mortgage loans is 620; however, borrowers should aim for a credit score of 760 or higher to get access to the best terms, rates and loans.
In Canada, the minimum credit score to get a mortgage is 640. A score higher than 680 mean you get access to better rates with A-Lenders—the largest, most competitive lenders in the market. A-Lenders include the big banks as well as large credit unions and large, well-capitalized mono-lenders (mortgage-only financial institutions). A score lower than 620 will severely restrict your ability to borrow, even with private lenders, although some private lenders have no minimum credit score that flexibility translates to much higher interest costs.
The Benefits of Excellent Credit Score for a Mortgage
Access to the Best Rates: A good credit score means you are a low-risk borrower for the lender. As a result, you get plenty of attractive rates to choose from.
You're in Full Control: A person with a low credit score would have fewer options to get an affordable mortgage since most traditional banks and reputed lenders have pre-requisites in place. The only door you could enter would be that of a private lender, and since they will be lending to a high-risk borrower, they will charge interest rates accordingly.
Easy Approvals: Perhaps the most significant benefit of a good credit score is high mortgage approval chances. A good credit score reflects your good payment history and balanced approach towards debt. As a result, your chances of approval become very high.
Mortgage Options for Low Credit Scores
So, it's now evident that traditional banks are not going to lend you money if you have a bad credit score. Your next resort is to search for B lenders or a private mortgage lender. Such lenders exclusively work with people who have bad credit scores.
Private lenders check your debt to income ratio. For this, you may need to furnish income or asset documents.
Keep the following in mind if you are considering opting for a home loan with a bad credit score from private lenders:
- Save more for a larger down payment. Most lenders will use debt ratios to determine your borrowing capacity—and part of this ratio is how much you have saved up to help buy this home. The larger your down payment, the greater the chance of getting approved for a mortgage, even if your credit score is less than ideal.
- Getting in at any cost isn't smart. It always feels like you'll miss out if you don't buy now. For 10+ years buyers have felt that and, yet, homes are still bought and sold every day. For that reason, buying a property at any cost isn't smart. Keep an eye on interest rates, remember to calculate fees and if the transaction costs to buy a home are really high, use tools to improve your situation (more down payment, better credit score) before buying a home.
- Keep an eye on your credit report. Keep improving your credit score to get a better mortgage refinancing rate in the future.
Credit Score for a Home Loan: FAQs
Who Creates My Credit Report and Credit Score?
The two main credit bureaus responsible for preparing credit reports and credit scores are Equifax and TransUnion. These companies collect data from creditors, store it, and share these scores using private calculations.
How Do I Check My Credit Score?
You can order your credit score directly from either Equifax or TransUnion. Transunion offers a free credit report once per month. They also offer a paid subscription for monthly credit reports. Such credit inquiries do not have a negative impact on your credit score.
Follow these steps to order your credit report:
Credit Report Online: If you want to check your credit report instantly, you may have to pay some fees on the official websites of Equifax Canada and TransUnion Canada.
Order by Mail or Fax: Use the forms provided by Equifax and TransUnion to make a request in writing. Send two pieces of acceptable identity proof. You will then receive your credit report through mail.
Order by Telephone: Use the following numbers to order your credit report via call. Remember, you have to give them the necessary information and follow their instructions. Thereafter, the credit report will be sent to you through the mail.
Equifax Canada, Tel: 1-800-465-7166
TransUnion Canada, Tel: 1-800-663-9980 (except Quebec) or Tel: 1-877-713-3393 (Quebec residents)
Do Mortgage Pre-approvals Affect My Credit Score?
Mortgage pre-approvals do not require your lender to check your credit score; however, mortgage pre-qualification does require a formal credit check, known as a “hard inquiry.” (In America, the same applies, but the terms are "pre-qualification for the soft check and pre-approval for the hard inquiry.)
Hard inquiries made for any type of loan can drop your credit score by a few points. While one inquiry can have a small impact, too many inquiries in short duration can drop your credit score by 10 or more points. Keep this in mind, particularly when shopping for a mortgage; to minimize this impact, be sure to keep all your mortgage pre-approvals (in Canada, pre-qualifications in America) within a two week period. If the inquiries are in a tightly defined timeline, lenders know your shopping for a mortgage and take this into consideration.
Can I Get a Mortgage With a 600 Credit Score?
As we stated, the minimum credit score required for a mortgage by Canadian banks falls between 620 to 680. You can still qualify for a mortgage with a score of 600, but only with private lenders.
In America, you need a minimum credit score of 620 to get a mortgage.
I Have No Credit History. Can I Still Get A Mortgage?
New immigrants and young adults might not have a credit history. While chances of securing a mortgage with no credit history are really, really small, it's not impossible. In Canada, some lenders offer “Mortgage for Newcomers to Canada Program,” and in America there are programs set up to help new buyers or new immigrants.
Another option is to use the tips to repair your credit score to build your credit report. The aim is to build a tracked history of how you are as a consumer in North America.
Tips To Improve Your Credit Score
We suggest checking your credit score regularly or at least six months prior to applying for a mortgage loan. If your credit score is low, you can improve it by:
- Paying your monthly payments and bills on time and in full.
- Use your credit lines wisely; avoid using more than 30% of your credit card limit.
- Avoiding lots of debt.
- Not applying for too many credit cards or store accounts right before shopping for a mortgage. Try to get this task done and over early in the credit score rebuilding process so the point hit for the hard inquiries occurs and you have time to build up the credit history (and improve your score).
- Review your credit report for a mistake or misuse of your identity.
- Don't close old credit cards or loans (unless they are costing you money).
- For more tips, check out: Credit Score Needed for a Mortgage or 6 Tips for the Best Credit Score.
A good credit score can save you thousands of dollars in the long run!
If you have a bad credit score, it is important you start practising sound financial habits that can improve it. It's always a good idea to compare and research any financial decision.