One of the most stressful parts about getting a mortgage is not knowing if your credit score is good enough to be approved. Since your credit score will not only help you get approved or denied, it will also play a part in how much your interest rate will be.
The higher the credit score the better the mortgage!
So How Does It Work?
The bank will request a credit score from one of the two major credit reporting agencies after you have applied for a mortgage. There are two companies in Canada: Equifax or TransUnion. In certain cases, they may request scores from both and use the lowest score.
For either of the agencies to give you a good score, you will need to have a credible history of borrowing and repaying. This means that for the last 1 to 2 years you have been making the minimum payment on time and have a history with at least 2 kinds of debt, personal, credit card, or line of credit.
This is one of the reasons why you want to start a credit history as soon as possible. If you are thinking of purchasing a house, buy everyday items with your credit card and pay them off in full each month as an effective way to make yourself a safer investment for any lender.
If you are seeking a mortgage with a co borrower (spouse), it is important to know if there is a difference in your credit scores. Most banks will use the lower score of the two, this can usually result in higher interest rates. It may be worth it to apply as an individual for your mortgage, that is of course if one of you have a higher score.
While your credit score is a major factor, banks will also look at your financial history. They will check your payment history, whether you have any unpaid debt, the age of your accounts and more. Once they have constructed a full picture of your finances is when they will make you an offer.
In most cases having at least a score of 620 is probably enough to be eligible for a mortgage, but you may not be able to find a home that is affordable. Anything that is below 600 is considered a subprime mortgage and will have high interest rates. A typical ideal score is around 720 to avoid price adjustments, while anything over 760 is guaranteed a worry-free score.
A mortgage broker can help, especially from a buyer’s perspective. A Mortgage broker can offer expert advice and give you access to a variety of lenders. Without a broker, you can find yourself a victim of the strict rules of the banks which can have many guidelines that work to the bank’s advantage opposed to your own.