If you’re planning to get new digs anytime soon, you’ll need to look good for a lender. I mean, real good.
First off, you’ll need a lucrative job and big bucks in the bank, especially if you want to buy in a city like Toronto. (A friend of mine recently conceded that she’ll be living in a box when she moves out from her parents’ place.)
Unfortunately, having and making lots of money isn’t enough. Shocker, I know!
Lenders want to know whether you can be trusted with their money, and they’ll pull up your all-important credit score to deem whether you’re ~worthy~. Here’s what you need to know to pass the test.
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What’s the minimum credit score you need for a mortgage?
Now, before we even get to this question, let me give you a quick rundown of What A Credit Score Is.
Don’t feel bad if you’re not in the know; it turns out half of us have never even checked their credit score before. *Raises hand sheepishly* I will be the first to admit that I only checked mine recently.
The big credit bureaus (in Canada, that’s either Equifax or TransUnion) snoop through your borrowing and payment history to assign you this three-digit number. Then they pass it on to lenders to give them an idea of how safe you are with other people’s money.
Your credit score ranges between 300 to 900. As you may have guessed, the higher your credit score is, the better you look.
The good news is that you don’t have to be perfect to qualify for a mortgage.
Canada’s government housing agency, the CMHC, asks people without a lot of cash in hand to have a credit score of at least 680. And you’ll find a lot of lenders and insurance companies are willing to work with a much lower score.
So it’s all totally manageable, even if you don’t have much credit history. Take it from me, a university student who’s only held a credit card for a couple years. My score’s currently sitting pretty between 700 and 800.
However, just because your credit score is decent enough to get a lender’s attention, you aren’t guaranteed a good mortgage rate.
What credit score do you need for a mortgage with lower interest rates?
The higher your credit score, the more responsible you look to a lender, which could make you eligible for lower interest rates. *waggles eyebrows*
To find out what kind of score would save you money, I talked to Jesse Abrams, CEO of the online brokerage Homewise. They deal with more than 30 lenders to try to find people the best mortgage.
“Generally, lenders will want clients to have a credit score above 650,” he told me. “That said, there are some lenders, especially for high-ratio mortgages (i.e. below 20% [down payment]) that will allow for as low as 620 because they are insured.”
Don’t make the grade? Abrams says anyone with a score below 600 will need to look to “B” lenders — companies that charge high interest rates to compensate for all the people who skip out on their bills.
And for you well-to-do folks, he added that a score higher than 700 would be ideal if you’re purchasing a home over $1 million.
What else do you need to qualify for a mortgage in Canada?
Now that you know what credit score you’ll need for a mortgage, let’s look at some of the other factors that lenders will take into consideration before handing you money. They’re going to get up close and personal with your finances, so this is no time to be squeamish.
They’ll judge your income. How much do you make? No, really, it’s a valid question. If your current salary is barely covering your rent, lenders will see that as an issue when it comes to paying off your mortgage in a timely manner.
They’ll want to see if you can hold a job. Most lenders haven’t caught on to the whole “gig economy” thing, which can be a problem when they judge your employment record. If you’ve held a full-time job for several years, you’re seen as less of a risk than someone who’s self-employed, freelancing or has been shifting positions a lot.
They’ll bring up your debts. If you’ve got a heck ton of debts that haven’t been paid off yet, a lender might hesitate to add another one to your list. When times get tough, they don’t want you choosing between payments on your mortgage, credit card bills, student loan and car loan.
All of those things can be major sticking points, especially if you’re asking to borrow a lot of money and take a long time to pay it off.
And, of course, your expected housing costs will also be taken into account. That includes things like property taxes and utility bills.
Pull out a calculator and guesstimate your monthly housing expenses — including your mortgage, utilities and all that jazz — then divide that number by your pre-tax income. The CMHC says this figure shouldn’t top 32%.
While you’ll probably have more wiggle room with lenders, it’s a good ratio to aim for.
Next steps: What you need to do to qualify for a mortgage
Think you’re ready to apply? Here are some steps to get started:
1. Check your credit score (it’s free!)
You already know that a lender’s going to check your credit score, so get ahead of the game.
I used Borrowell to check my score, and I was pretty pleased with how easy and fast the process was. Just sign up and answer a few questions, and you’re good to go!
You’ll get a free credit score and credit report, which get updated every month, as well as personalized tips and recommendations to improve your score.
2. Clean up your credit
If your credit score is looking low, figure out why. Watch out for late or missed payments on your credit report and start taking the necessary steps to boost your score.
It could be as simple as paying your bills on time, or maybe you just need to apply for other types of credit.
Borrowell has an AI-powered credit coach, Molly, that can give you specific advice on how to up your game. She recommended I apply for more credit cards when I got started, for example, since I only had one.
3. Compare mortgage rates
Once you’re looking good enough for the stingiest of lenders, it’s time to check out mortgage rates.
Even if you’re still browsing through the listings and haven’t decided on a home yet, you can get pre-approved for a loan so you know how much you can borrow.
You can either call around to a bunch of lenders, or you can get a brokerage like Homewise to do the dirty work for you. The important thing is not to settle for the first rate a bank will throw your way.
Basically, you want to Be Prepared — *cue musical number from The Lion King*. I wouldn’t normally solicit advice from a Disney villain, but Scar does have a point. You don’t want to be caught unaware, especially with a purchase this big.