Credit Scores Help Lenders Assess Your Credit Worthiness
As a prospective homebuyer, a hugely influential factor regarding your potential mortgage approval is your credit score. A credit score is a numerical rating given to individual consumers, which is calculated based on credit and payment histories. They are used to help determine the measure of an applicant’s credit risk, and are most often referenced by credit-giving companies or institutions like:
- Credit card companies
- Mortgage Brokers
- Car dealers
Any time you apply for new credit, a loan, or a mortgage, there is a good chance your rating will be checked.
How Your Credit Score Will Affect Mortgage Applications
Credit scores in Canada range from 300 to 900, and lenders or brokers will use your score to evaluate whether to decline or approve your mortgage application, and to determine the interest rate on your loan. If your credit score is between 300 and 620, you:
- Have a credit rating that ranges between poor and fair
- Are a higher credit risk for lenders
- Are more likely to be denied when applying for a loan or mortgage
- Will be charged a higher interest rate on approved loans
If your rating is between 680 and 900, you:
- Have a credit rating that ranges between good and excellent
- Are a low-risk borrower
- Are more likely to have loan or mortgage applications approved
- Will be privy to lower interest rates
Different loan-to-value (LTV) ratios demand varying credit scores, so you might still be eligible for a loan even if you have a poor credit rating. If you are applying for a mortgage that has an LTV ratio of less than 60%, lenders do not require a minimum credit score. But for higher LTV ratios, there are minimum scores you need in order to be eligible for the loans, and they are:
- 580 for an LTV ratio of 60.1-80%
- 600 for an LTV ratio of 80.1-90%
- 650 for an LTV ratio of 90.1-95%
How Credit Scores are Calculated and How to Find Yours
Your credit score is calculated using what is known as the FICO system, a complex formula that weighs factors like payment history, the amounts of the debts you have owed, the length of your credit history, your recent credit, and the types of credit you have had.
You can look into your own credit bureau by contacting any of Canada’s three reporting agencies: TransUnion, Equifax, or Experian. It is recommended that you obtain credit reports from at least two of the agencies, and ensure the information is accurate. A poor credit score could cost you thousands of dollars in higher interest rates, so make sure the information contained within is correct.
No matter what your credit score, there are independent mortgage brokers out there who deal with lenders that approve high-risk loans for people who have poor credit, or little to no credit history at all.