How Does Credit Score Impact Residential Mortgage Approval In Canada?
Buying a house is always a big deal. Most homebuyers purchase properties with residential mortgages. These mortgages are home loans secured against the property you purchase. Your credit score plays a huge role in determining whether you will get a conventional mortgage or not.
The importance of a credit score for a home loan cannot be denied. Conventional mortgage lenders often check this score while processing your application. Applications with low credit scores are immediately rejected, even if the borrowers have a steady income and a profession that qualifies them for the loan.
The link between your credit score and mortgage approval is clear in the case of conventional mortgages. However, you can bypass this link with alternative mortgage lenders. These private lenders do not focus on your credit score while processing your application. Their main focus is the property’s marketability. If the house you want to buy is marketable, you can get a mortgage even with a low credit score.
You can approach trusted alternative lenders in your city or province for such deals. For example, if you want a residential mortgage in Toronto, find people or companies considered “The Good Lenders” for the best services. These dependable lenders will help you buy your home without considering your credit score.
Having said that, credit scores continue to determine the fate of millions of conventional mortgage borrowers. Let us understand how credit score affects a mortgage in Canada.
What Is A Credit Score?
A credit score is a number showing how creditworthy you are. It contains three digits and often ranges from 300 to 900. A higher credit score means that you have repaid all your loans and advances on time. A lower credit score implies that you have had more missed payments, delayed payments, and defaults.
The credit bureaus Equifax and TransUnion calculate your credit score in Canada. It is based on these key factors:
- Payment history
- Credit utilization
- Length of credit history
- Credit mix
- New credit inquiries
If your credit score for home loan is high, mainstream lenders are more likely to approve your application. If not, you will need to approach alternative lenders.
Here are the general credit score tiers borrowers in Canada should know:
- 800 to 900 – Excellent
- 740 to 799 – Very Good
- 680 to 739 – Good
- 600 to 679 – Fair
- Below 600 – Poor
Why Is Your Credit Score Important For Residential Mortgages?
Your credit score is no less important than your financial health. From banks to credit unions, all conventional residential mortgage lenders will check this score before approving or rejecting your application.
Here is what makes your credit score important for residential mortgages:
Mortgage Approval
Your credit score determines whether your mortgage application will be approved or rejected. In most cases, borrowers with a credit score of 680 or more can easily get their applications approved (provided they meet other lending criteria, too).
On the other hand, a score below 600 can make things difficult for residential mortgage borrowers. You can face a direct rejection from lenders in such cases, especially as the real estate demand in provinces like Ontario overshadows supply.
Interest Rates
Your credit score for home loan also determines the interest rates you get. Conventional lenders will charge you more if your credit score is lower. This is because low creditworthiness increases their lending risk.
Down Payment
If your credit score is low, the lender’s risk increases. This can increase the down payment they ask from you to manage their risk.
Mortgage Amount
A residential mortgage lender won’t risk loaning you a higher amount if your credit score is low. Borrowers with higher scores can get greater mortgage sums for buying their dream houses.
Alternative Lending Options For Low Credit Scores
If you have a high credit score, you can approach the A-lenders for your residential mortgage. These lenders include mainstream banks and credit unions. They are more likely to approve applications with credit scores of 680 or higher. Moreover, the lending criteria here are strict and rigid.
However, if you have a lower credit score, do not lose hope. You can approach other mortgage lenders who can help you buy your dream home in Canada:
B-lenders
These are the alternative lenders who accept applications rejected by conventional lenders due to low credit scores. You can get a residential mortgage from these lenders with a credit score lower than 600, provided you are ready to pay higher interest rates.
Private Lenders
You can approach private mortgage lenders in Canada if your application is rejected by both A-lenders and B-lenders. These lenders have flexible lending criteria and process your application faster. The mortgage you receive depends on the marketability of your new home, regardless of your credit score.
Many private lenders also provide residential mortgages to first-time homebuyers and people with bad credit.
Tips To Improve Your Credit Score
If you believe you can improve your credit score before applying for a residential mortgage, this is how you can do so:
- Pay all your bills on time
- Clear all outstanding utility bills
- Reduce credit utilization (do not use more than 30% of your credit card’s limit)
- Do not explore more credit instruments before settling your existing debts
- Keep your credit history longer by keeping your old accounts active
- Track your credit report periodically
The Final Word
Your credit score has a direct and immense influence on your residential mortgage. However, this is true only if you approach conventional mortgage lenders. If you are struggling with your credit score or have bad credit, you need not lose hope.
Private lenders can help you get residential mortgages with flexible lending criteria. You won’t need a high credit score or a profession to qualify for the deal. If the property you want to buy is marketable, you are likely to get a good deal. Such private and alternative lenders keep the dreams of many borrowers alive!
