When you apply for a mortgage, lenders check your credit score, along with your employment history, debt to income ratio and other factors, to determine their potential risk. A high credit score may help you qualify for lower interest rates than someone with low or no credit.
Credit scores can range between 400 and 900 (generally, lenders like to see a score of 700 or above). The two credit bureaus in Canada are TransUnion Canada and Equifax and these bureaus track the credit histories of millions of Canadians.
A strong credit score is especially important if you’re applying for an insured mortgage where you’re borrowing more than 80 percent of the home’s value. Some banks will overlook a lower credit score (in even in the low 600s) to some degree if it’s an uninsured mortgage, meaning you’ve put down 20 percent or more.
For insured mortgages and best rates, most lenders want to see a minimum credit score of 680. If your score is at 680, the lender may want an explanation of why the credit score isn’t higher (perhaps because of missed bills when you were out of the country or missed payments due to a divorce). A few lenders will grant mortgages to those with low credit scores, but they will do so at a rate premium and a fee to cover their enhanced risk. Coast Capital, for instance, can charge a .5 to 2 percent fee and increase their rates by 1 to 3 percent under their specialty program for buyers with credit issues.
It’s a good idea to check your credit report and score throughout the year so you can monitor your accounts and work towards increasing your credit score to a desirable number. That way you can work to clear up any errors or issues when they come up.
Here are a few tips for raising your credit score before you apply for a mortgage:
- Always pay your credit card bills on time. Missed or late payments will ding your score, as will carrying a large balance.
- Limit your credit applications. Each hard inquiry on your credit (for instance, when you apply for a retail credit card or an auto loan) temporarily lowers your score. However, if you have a mortgage broker checking your file you would only see one hit, even if they’re inquiring on behalf of multiple lenders. If you are going to multiple brokers, multiple inquiries may show up on your credit.
- Never charge more than 75 percent of your available credit. Maxing out (or nearly maxing out) your cards makes lenders nervous because you appear to be over-leveraged. Even if you pay off the balance before payment is due, the balance can still show up on your credit report depending on when the information is gathered.
- Pay off any collections actions and send the remediated letter to both credit bureaus to have your credit report updates. Always keep a copy of that as well in case lenders want to see proof that the debt was paid.