Your credit score is one of the main factors determining whether you qualify for a mortgage and the rates you will be offered. Your credit score, debt service ratios, and the mortgage stress test significantly impact your chances of getting approved for a mortgage.

In Canada, credit scores range from 300 to 900, with a score of 650 generally being the minimum required to get a mortgage approval from most lenders. Improving your credit score before applying for a mortgage can help you secure better interest rates and increase your chances of getting approved.

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Key Takeaways

• The minimum required credit score for most prime lenders is 650 or higher.
• Factors that affect your credit score include payment history, credit inquiries, and credit utilization.
• Your debt service ratios, the mortgage stress test, and your loan-to-value ratios will also impact your mortgage approval and the interest rates offered.

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What Is the Minimum Credit Score for a Mortgage in Canada?

The minimum credit score required to qualify for a mortgage in Canada can vary depending on the lender. However, a credit score of 650 is typically the minimum required for most lenders. You may have access to better rates if you have a higher credit score. If you have a credit score below 650, you may have difficulty getting approved for a mortgage through traditional lenders and may need to explore alternative lending solutions. 

How Credit Scores Impact the Mortgage Process

Since your credit score indicates how well you have managed debt in the past, a higher credit score can signal to lenders that you are a lower risk, making you more attractive as a client. Higher credit scores can make it easier to obtain more credit in the future and help you get more competitive rates. 

A lower credit score could indicate that you may be a higher risk to the lender, as you may default on the loan, making you less attractive as a client. Lower credit scores can make it harder for you to access credit and may mean you are offered higher interest rates.

Factors That Impact Your Credit Score

Your credit score is determined by a scoring model that varies depending on the reporting credit bureau. The scoring model weighs common components, including payment history, credit inquiries, credit history, credit mix, and utilization ratios. The weight of each component may vary depending on the scoring model used. 

Payment History

This shows how well you have handled debts and whether their minimum payments have been made on time. It provides a complete overview of all credit accounts, including credit cards, credit lines, installment and term loans, auto loans, student loans, and secured facilities like home equity lines of credit (HELOC) and mortgages. 

Your payment history will also show any delinquencies or missed payments and indicate whether you have previously filed for bankruptcy, had accounts sent to collections or written off, had a property foreclosed on, or had wage garnishments. 

Credit Inquiries

Credit inquiries are done whenever you check your credit score, apply for new credit, are pre-approved for credit, or if you need a credit check for a potential employer. A credit inquiry can either be soft or hard, with hard inquiries impacting your credit score. 

A soft credit inquiry occurs when you check your credit report, are pre-approved for credit or an increase in your credit limits, or when a potential employer runs a credit check. These do not affect your credit score and won’t appear on your credit report. 

A hard credit inquiry occurs when lenders check your credit history when applying for credit. This happens when you apply for a new credit card, mortgage, car loan, or personal loan. These can negatively impact your credit score, and too many hard inquiries in a short timeframe can significantly impact your credit score. However, this shouldn’t deter you from shopping around for a better mortgage rate, as multiple hard credit checks from mortgage lenders will only count once if completed within 45 days.

Credit History

Your credit history is the length of time you have had credit accounts active. A shorter credit history doesn’t provide enough data to evaluate your past behaviours, which can lead to a lower credit score. A longer credit history provides more data on how you have effectively managed all debts over time. 

Credit Mix

Your credit mix is the variety of accounts you have on file. A diverse mix of credit products can show you can responsibly manage varying types of debt. These include revolving debts like credit cards and lines of credit and term and installment loans like mortgages, auto loans, student loans, and personal loans. 

Utilization Ratios

The credit utilization ratio compares the amount of credit you use to your available credit limits. It is calculated by dividing your credit balances by your credit limits. You should keep your credit utilization at or below 30%. Higher utilization ratios can indicate financial difficulties or that you are not a responsible borrower, negatively impacting your credit score. 

Other Factors That Impact Your Mortgage Rate & Approval Process

Your credit score is just one factor determining if you will be approved for a mortgage and the rate you will be offered. In addition to meeting your chosen lender’s minimum credit score, you must also meet other qualifying criteria. 

Debt Service Ratios

There are 2 calculations lenders use to assess if you have the income to manage debts. Gross debt service (GDS) measures how much of your pre-tax income goes toward household debts. Total debt service (TDS) measures how much of your pre-tax income goes towards all your debts and includes household debt, student loans, car loans, child or spousal support, credit cards and lines of credit payments. 

The maximum debt service ratios that lenders allow will vary. However, lenders typically allow a maximum GDS of 32% and TDS of 40% for uninsured mortgages and a maximum GDS of 39% and TDS of 44% for insured mortgages.

Mortgage Stress Test

You will be required to pass the mortgage stress test to qualify for a mortgage with all federally regulated lenders. The stress test ensures you can handle mortgage payments if interest rates increase. Lenders will assess if you qualify using a minimum qualifying rate of your contract rate (the rate the lender offers you) plus 2% or 5.25%, whichever is higher. 

Loan-To-Value (LTV) Ratio

Your LTV ratio is the percentage of the mortgage amount you require to borrow compared to the home’s purchase price or appraised value. Your LTV ratio will determine if you need to purchase mortgage default insurance and can impact the interest rate you qualify for. A higher LTV ratio requires an insured mortgage and default insurance but typically has lower interest rates. 

Frequently Asked Questions

Final Thoughts

When planning to purchase a home, your credit score is pivotal in increasing your chances of getting approved for a mortgage and influencing the interest rates offered. Improving your credit score takes time, so it’s best to start as early as possible to build credit and increase your score. The higher your credit score, the better your chances of having more lender options and borrowing solutions to choose from.

Ready to buy your dream home? Start your mortgage journey with a nesto mortgage expert today. 

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