Cheat Sheet – what your credit score should look like to get approved for a mortgage

Many Canadians want to be homeowners. But not all realize that they need to meet a minimum credit score for a mortgage in Canada, and it's much higher than what is needed for a loan or credit card. There are far more rigorous credit checks and much higher expectations of where your finances must be. Before you find out if you will be approved for a mortgage, make sure you’ve met the following:

1.Your credit score for a mortgage should be 680 or above

To qualify for the best mortgage rates available, your credit score should be at least 680 or higher. If your credit score is lower than 680, you have a couple of option. You'll find some mortgage providers will offer you a mortgage if your score is between 600 and 680, but it's very likely you'll pay much higher interest rates. Another option is to improve your credit score prior to purchasing a home. If this sounds like the better option for you, why not consider a secured savings program to build credit? It’s a low-risk option that will have a positive effect on your credit right away. Plus, it will leave you with some savings!

2. Even with a high enough credit score for a mortgage, insufficient credit history can result in not being approved

If you’ve just begun using credit products, you won't have an extensive history for lenders to see. It’s nearly impossible to paint a thorough picture of your credit habits from a short credit history which is why you'll want to wait and establish that score before applying. The further back your good credit goes, the better your response from mortgage lenders is going to be. This is pretty self-explanatory: a long history of a good credit score is a good indication you can handle more. Your credit report should reflect at least a year of diverse credit products in good standing.

A great first step is to check your credit score for a mortgage, before applying, so that you know when you should apply. You can check your score for free here! The better your credit score for a mortgage, the better interest rate you’ll get. This can save you tens of thousands of dollars in the long run. You should consider building up your credit before you purchase a home, to make it that much more affordable.

3. Your credit usage percentage should be at around 30% or below

Credit usage percentage is the total amount of credit you have to your name vs. how much of it you have used. For example, if you have two credit cards: one with a $10,000 limit and a $3000 balance, the other credit card with a $5000 limit and $1000 balance, and you have a $5000 line of credit with a $2000 balance, you have $20,000 total credit. You’ve used $6000 of that $20k which is around 30%. That means your credit usage percentage is 30%. If you can get your usage to drop below 30%, you should be in good enough shape and have a good enough credit score for a mortgage. Maxed out credit cards cause lenders to be skeptical about your spending responsibility.

4. You don’t want to have too many recent credit inquiries showing on your credit report

If you’ve applied for a few credit cards, or car loans or lines of credit recently, your credit report and credit score is going to show that. If there is even just a few of them in a small period of time, it’s going to make you look like you’re desperate to get your hands on some money. It’s going to look like you might be a big risk to lend to.

5. Your credit report should reflect a good diversity of credit products

When you’re successfully managing a credit card, a line of credit and a loan, potential mortgage lenders are going to see someone who will be capable of handling one more payment every month. If all you have is one credit card, even if you’ve managed it well and kept it in good standing, your credit report is not going to look as good as it could. Lenders may still wonder what sort of risk you pose as a borrower - will you be able to handle multiple credit products or is one your limit? There is no way of them knowing. If you have poor credit, there are still ways to go about diversifying your credit products. Look into secured cards, secured lines of credit and credit building programs. Click here for more info on those.

6. You should have a debt-to-income ratio of 36% or less

Debt-to-income ratio is your monthly take-home income versus what you pay out towards debt. For instance, if you have $5000 take home pay every month, and your minimum payments on all your debts total $2500 every month, you have a debt-to-income ratio of 50%. Getting it as low as possible will show the lender you have plenty of income to put towards mortgage payments.

7. There should be no bankruptcies, consumer proposals or excessive derogatory items on your credit report

A derogatory item is a late payment, a missed payment, or a payment that was not enough. While you can still get approved for a mortgage with an old bankruptcy, derogatory item, or consumer proposal on your credit report, you will find it much more difficult and the interest rates you have access to won’t be very good.

8. Even with a high enough credit score for a mortgage, you might have to prove the source of your down-payment

You should have a record of where your down payment came from if you can't prove you've had the money for more than three months. Lenders will want to ensure that you're not borrowing your down payment, as that can impede your ability to pay your mortgage back. If you’ve saved your own down payment, your account records should be proof enough. If you've received your down payment as a gift from friends or family, they will need to write and sign a gift letter.

9. You should have a steady source of income

One thing that a mortgage lender will look at is your income stability. If you’ve only just begun working at your job, this could be a strike against you when it comes to mortgage approval. You also might have difficulty getting approved for a mortgage if you’re self-employed or work for cash a lot. What your mortgage provider is going to want to see is a steady income for as long as possible. If you’ve just begun a new job, perhaps waiting a short period of time is in your best interest before applying for a mortgage. If you’re self-employed, try to do everything by the books and have all your revenue accounted for in your bank statements.

10. You should have a decent income

The new mortgage stress test implemented by the Ministry of Finance at the end of 2016 looks exclusively at income to determine your ability to pay back a mortgage. This test looks at your income and assesses whether or not you could make monthly payments based on their posted rate, which is typically much higher than the interest rate you'd be approved for by your lender. This prevents you from running into trouble if there was ever a significant interest rate hike on your mortgage. There are two ways to get around this. You can increase your income, or save up to make a 20% deposit which allows you to bypass the test. Unfortunately, with housing prices as high as they are in Canada, saving 20% of the purchase price is very difficult.

Even with the credit score for a mortgage, are you ready to buy that home?

Sometimes, it’s just not the right time to buy a home. This is a step that can’t really be reversed. You’re locking yourself into many, many years of monthly payments you will have to make or destroy your credit and lose your home. Even if you lose your job, hurt yourself, or go through other life-altering traumas, you will still on the hook for the monthly payments on your mortgage.

The new rules and obstacles in our way to home-ownership are there for a reason: to protect us from defaulting on our mortgage. But none of these new rules and regulations can protect your credit score if you jump into something so huge without considering everything. An organized, prepared home-buyer is far more likely to reach the end of their mortgage still a homeowner and with a great credit score. The keys to responsible home buying are patience and preparation. With enough patience and preparation, you won’t be held back by anything.

Before you leap into this, head over heels, you’ve got to make sure you’re ready. Do you have a backup plan? Do you have an emergency fund, should something bad happen? Taking the time before leaping into home-ownership, to make sure you have something to fall back on, will give you security and protect your investments while making sure your credit score does not suffer.

Are you ready for all the fees that go side by side with purchasing a home?

Do you have enough money saved to cover home inspection? Can you afford the property taxes? Earlier we created a list of fees first time homeowners need to be budgeting for. Take a look at this list of fees that you’re likely to encounter while purchasing a home and ensure you can take them all on without jeopardizing your credit score or financial stability.

If you find that these fees makes purchasing a home slightly out of reach, just remember: there is no rush. It is far better to wait before going into something so long-term prepared, rather than jumping into it without being totally ready for what you’re getting yourself into.

It’s good practice to work hard for about 6 months towards a better credit score for a mortgage prior to applying. This establishes a decent history of good credit management and can boost your score significantly if you keep all your credit products in order. If you want to be able to grow your credit score even faster, consider starting a credit building program from Refresh Financial - there’s no money required up front to get started and all your on-time payments are going to be reported to the credit bureaus just like a loan. Click here to get started.

Buying a home is stressful, but you can take a lot of that stress out of the equation if you go into it with good credit. It requires patience, self-discipline, and sacrifice, but it will all be worth it when you’re sitting in your cozy new home as a first time home-buyer.

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Refresh Financial’s credit builder loan is just a click away! You can be on the right track to a better credit score for a mortgage, and lower interest rates will be achievable!