August 26th 2021
Ways to Improve Your Credit Score For a Mortgage
By Jessica van Rooyen
When it comes to purchasing property, there are very few people who can just buy a home out of pocket. Especially considering the pricing surges in major markets like Toronto, people are more reliant than ever on financial institutions to help them realize their homeownership dreams. Unfortunately, this isn’t an easy process for many Canadians.
Financial institutions typically have stringent requirements for who qualifies for a mortgage, and credit checks are a key indicator of a safe versus risky candidate. Financial institutions use credit scores as part of their assessment to make an informed determination on the loan amount for a candidate. Here's everything you need to know about the process of analyzing, managing, and improving your credit score for mortgage purposes.
What is a Credit Score, and Why Do I Need One?
Aside from employment status, your credit score is one of the single most important determinants of whether or not you will receive a mortgage loan. These calculated numbers are a real-time representation of an individual’s financial wellbeing. It incorporates relevant behavioral information like on-time bill payment or carrying lots of debt. These scores allow lenders to make accurate assessments and informed decisions on applicants that may carry a high amount of risk.
In the same way that you wouldn’t loan your car to an irresponsible friend, banks tend not to give large mortgages to individuals who display risky financial behavior.
Canadian Credit Score Ranking System
In Canada, there are two approved credit-reporting bodies responsible for credit score determinations: Equifax and TransUnion. These private companies collect and evaluate information from various Canadian creditors about your financial behaviour and then develop a numerical score. Some financial information that is relevant to your credit score includes:
- Outstanding debts that have been sent to collections agencies
- Any liens that are registered in your name
- All credit cards and lines of credit in your name
- Bounced cheques or insufficient payments made to institutions
Essentially, credit scores work like this — the number increases when you exhibit good financial behaviour and decreases when you manage credit responsibly.
What is a Good Credit Score in Canada for a Mortgage?
The average Canadian has a credit score of 650. Most people are fairly good at managing their debt and making on-time payments but may have past experiences where they missed payments or were sent to collections.
According to Equifax, scores between 660 and 900 are classified as either good, great, or excellent. Those looking to leverage their credit score for mortgage purposes should strive for a number within this range, with a score between 660 and 730 representing a realistically achievable goal. At the other end of the spectrum, people whose debt is routinely transferred to collections, carry their credit near the limit, or are involved in fraudulent activities have scores that are well below 600.
Minimum Credit Score for a Mortgage in Canada
When securing a mortgage in Canada, many people are interested in the minimum necessary credit score. Depending on the lender you want to partner with, the typical credit score floor sits between 600 and 550.
Improving a Bad Credit Score
If you are struggling with a poor credit score, it’s common to think your housing options are drastically limited. While this is true to a certain degree, these scores are by no means static, and there are multiple steps you can take to improve your standing in the eyes of lenders. Here are some of the best ways you can improve your credit score:
Routine Monitoring of Credit Score — A great way to ensure that your credit score is trending in the right direction is simply routine monitoring. Constantly checking in on your Equifax or TransUnion score provides you key insight into how your financial activity impacts your score.
Frugal Credit Use — If you are someone who struggles with over-leveraging your credit, a key way to improve your credit score for mortgage purposes is to use your credit lines and cards more sparingly. Reducing expenditure on larger, costly items and cutting out other expenses is key to using credit more frugally.
On-time Bill Payment — By far, one of the easiest things you can do to improve your credit score is to pay your bills on time. Consistently paying off your balance, or at least making the minimum payments, shows mortgage lenders and credit reporters that you can responsibly manage debt. Even if you have been carrying a balance for an extended period, a routine payment schedule displays low-risk behavior that has an outsized impact on your credit score.
Consistent adherence to each of these strategies will help you improve your credit score and help you obtain a better mortgage.
Managing a Bad Credit Score
In cases where improving your bad credit score is not realistic due to time constraints, financial necessity, or other situational factors, you can still manage your score to help secure a mortgage. Here are three ways you can secure funding for a mortgage by managing a suboptimal credit.
Larger Down Payment — If you’ve come across the home of your dreams and don’t have time to improve your credit score, then making a larger down payment is a good way of showing lenders that you can handle a mortgage. Putting down more money than the standard 20% will give you more leverage when dealing with lenders. It’s also a great example of your ability to budget and save significant income.
Explore Different Mortgage Lenders — From banks to B-lenders to private firms; there are multiple different mortgage lenders that you can go to if your credit score makes it difficult to find support from traditional establishments. It’s important to remember that these organizations often risk additional financial burdens via high-interest rates and uninsured lending. Still, securing a bad credit mortgage is possible at certain financial institutions.
Co-Signing and Joint Mortgages — An increasingly common phenomenon given the volatility of both the Canadian economy and real estate market, joint mortgages and co-signing are becoming a popular strategy for those looking for creative ways to get into the housing market. The former refers to mortgage arrangements where multiple parties sign on to carry the debt, while the latter occurs when a third party uses their credit as collateral for someone else who needs a mortgage.
Remember, a bad credit score isn’t the end of the world. But it does mean you will need to make some lifestyle changes and put in some additional effort to get yourself back in good standing with lenders. Doing so will help you make your way into that 660+ range that will unlock a better mortgage for your real estate investment.
Even for those who cannot improve their credit score for mortgage purposes, other financial strategies can be leveraged to help obtain a mortgage. For more information on how people are using their credit score for a mortgage in Canada, reach out to your local real estate professionals today.