If you are looking to get the best available interest rates when applying for a mortgage, your credit score can make a big difference in helping you secure the best options. When it comes to mortgages, the higher your credit score, the better your rates will be. Generally, the best interest rates are offered to Canadians with a credit score above 680, with the very best being offered to those with a score above 740. For Canadians who want to secure a mortgage but have bad credit, there are also options available to you, so read on and don't consider yourself out of luck just yet.
In this article, we are going to show you how credit levels affect your mortgage rates, some information on how credit scores work and why they matter, and offer some advice for those looking to secure a mortgage with bad credit. We will also cover what other factors mortgage lenders consider in determining your mortgage rates and how to find the best mortgage for you.
Your credit score is essentially an indicator of how safe it is for banks to lend you money. Banks are averse to lending money unless they can get it back, as they make most of their money by collecting interest. Every person has their own unique credit score that reflects their personal history of borrowing and repayment.
Before the invention of credit scores, creditworthiness had to be judged in less formal and less accurate ways. This may have worked for smaller local lenders, but in the modern world where lenders are international organizations who don't know you, there needed to be a formalized system for determining one's creditworthiness. Thus, credit scores were invented in the mid-20th century to simplify the process. Though many people bemoan the importance placed on credit scores, and there have been many valid criticisms on the failings of the system. Without them, you would have the burden of proving your own credit history and trustworthiness which would be a lot more difficult than pulling a credit report.
If you have a high credit score it means you have a well-established history of borrowing and repayment. Therefore, a bank can be more confident in its loan to you and offer you lower interest rates among other benefits. If you have a lower score, the bank can not be as confident in its loan and will deploy increased rates or other protections to minimize damage from a potential default. Sure, the banks could just charge everyone the same high rates, but they want to attract safe borrowers and discourage risky ones in order to guarantee their success.
Like it or not, the credit score system is a major component of our financial reality and every person who hopes to borrow money will have to take their credit score into consideration. You can easily find your credit score through one of the various credit reporting websites that offer a credit report, or by contacting the credit bureaus who can issue a full credit report. Canada has two major credit bureaus: Equifax and TransUnion. Your credit score changes often and the factors that influence it are not always well understood. You should always check your credit score regularly for the most up-to-date info.
Some factors beyond pure payment history that credit reporting agencies use to calculate your credit score include:
Funnily enough, using too much credit can actually be bad for your credit. Conventional advice says to keep below 30% usage of your available credit limit. For example, that means if you have a credit limit of $10,000, you should try to keep your usage below $3,000. Maxed-out credit accounts can cause banks to be suspicious of your financial responsibility and spending choices.
Anytime a borrower takes a credit report from your account for the purpose of checking your score, this is noted in your credit history. If your credit file shows multiple credit checks in a short period of time it can make you seem desperate for money and make banks wary. These so-called 'hard inquiries' can stay in your history for up to two years.
However, there are online services that offer regular credit scores without needing to make a note on your history. These reports might be less accurate and provide less information than a full report, but they do allow you to quickly check your credit without raising any red flags.
Other factors impacting your score may include the diversity of credit products used, your income and debt to income ratio, and any previous history of bankruptcies or delinquencies.
It's easier to have good credit if you have very little history and, as a result, fewer chances to have damaged your score. Between two borrowers with the same score, mortgage lenders will be more attracted to one with a longer credit history. This is also why older people tend to have higher credit scores than younger people - they have had more time to secure a good history.
Your credit score affects the interest rates you can access when looking to get mortgage approval. The higher your credit score, the better rates you will get and vice versa. A credit score ranges between 300 and 900 with anything above about 660 being considered a good credit score. Here is what to expect with each given credit score when trying to get approved for a mortgage:
There is no minimum score per se. However, securing a mortgage loan gets much harder with a bad credit score, and at rates below 600, it can get very hard to find a mortgage that is worth it. You can always try applying for a mortgage with a poor credit score but be prepared to get less than ideal terms – or nothing at all.
Your credit score also affects your eligibility to receive mortgage default insurance. For buyers putting less than 20% down on their mortgage loans, they will be required to get mortgage insurance. This measure is put in place to protect lenders from defaulting loans. This is also why, according to the Canada Mortgage Housing Corporation, you need a minimum credit score of 600 to receive insurance.
If your score is below 600, you may be able to get approved for a mortgage by some private insurers and private lenders who do not have the same minimum credit score requirements, but you may have to pay much higher rates.
Even if you have bad credit, the ability to put up 20% or more of your down payment may help convince lenders of your financial responsibility. The logic is that not only does the high down payment indicate a healthy income and ability to cover mortgage payments, it also allows you to make lower regular payments or a have shorter amortization period. This gives some security back to the lender that may have been lost by a low credit score.
The major banks are not the only lenders offering mortgages in Canada, though they are the most popular. There is a slew of other financial institutions offering mortgages to Canadians, often with very different terms and rates than the traditional lenders.
An alternative lender may require a down payment, collect a higher interest rate, or both. They may also charge additional fees that are not required by the big banks such as a loan processing fee.
If you don't like the options of an increased down payment or an alternative lender, you may consider a co-signer. The co-signer agrees to take responsibility for mortgage payments if you fail to pay and their credit score will be taken into account when securing the mortgage. However, make sure your co-signer knows that they will be on the hook for missed payments, and how they may be at risk of damaging their own credit.
If you can't secure a mortgage you are happy with, it may be worth holding out until you can achieve a good credit score. There are multiple different things you can do to improve your credit score, but it won't happen overnight and will take some commitment on your part.
Things such as paying bills on time, keeping credit utilization low, paying down debts, maintaining a mix of credit products, and being selective about asking for new credit should gradually help your score increase. Be sure to check your credit report regularly to see if your efforts are working, as well as to catch any mistakes in credit reporting that could damage your efforts. If you notice any mistakes, contact your credit bureau immediately.
A credit score is one of the biggest considerations in terms of the terms of your mortgage, but other things can cause your rates to change as well. Some potential factors include your income, employment history, the amount of your loan, and the actual property in question. Lenders will also consider your living expenses and financial responsibilities like property taxes and utilities when considering your mortgage proposal. You will also need to pass the mortgage stress test to ensure you can handle your mortgage payments in order to be qualified.
First of all, though your score means you probably already have good credit habits, do your best to make sure you keep your score high while you look for mortgage approval.
Most Canadians take their mortgages from the big banks, so this may be the place to start for you. Banks are all in competition with each other and will offer similar packages, though with subtle differences. It's important to shop around and find what works best for you.
If you feel unsure about choosing the best mortgage, a mortgage broker may be good for you. A mortgage broker is a professional whose job is to evaluate the different mortgages available to you and help you get the best deal possible. Mortgage brokers can help you save time and find a better deal by comparing the many mortgage rates across major banks, credit unions, and alternative lenders. They will also help you submit your mortgage application and secure mortgage pre-approval. Of course, you will pay for the services of a broker, so make sure to weigh the costs and savings.
The mortgage approval process can be complicated, but by having a strong credit score you can give yourself many more options. Beyond just mortgages, a good credit score can help you out in other types of borrowing such as getting credit cards or a car loan. You should make yourself aware of your current score and always keep in mind how you can improve it in the future.
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