During the early days of the mortgage business, brokers would require a lot of paperwork…
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Before you can receive a mortgage in Canada, you must have a number of items in the order. One of the most crucial is having a decent credit score. But what exactly is a good credit score? After all, there are numerous mortgage lenders to choose from, each with its own set of lending standards.
This article will tell you what credit score you’ll need to qualify for a mortgage and what else you should think about before beginning your mortgage application.
The Canada Mortgage and Housing Corporation (CMHC) raised the minimum credit score threshold for insured mortgages from 600 to 680 on July 1, 2020. This was a huge increase, and industry analysts’ reactions were varied. Many people believed that the new standard was too stringent and would prevent too many Canadians from entering the property market.
The CMHC minimum score is required for at least one borrower on a mortgage. This makes things a little easier for couples, as only one borrower needs to exceed the 680 level.
What exactly is an insured mortgage?
You may be wondering what exactly an insured mortgage is. It is commonly referred to as a CMHC mortgage since it applies to any mortgage in which the borrower pays a downpayment of less than 20%, down to the minimum downpayment of 5% of the purchase price of a home.
The term “insurance” refers to mortgage default insurance, which protects the lender in the event that the mortgagor fails to pay the mortgage as promised. CMHC, together with Genworth Financial and Canada Guaranty, is the major provider of mortgage default insurance in Canada. Check out our mortgage default insurance guide for more details.
Minimum Credit Score for Traditional Mortgage
A traditional mortgage requires a 20% down payment or more. Because conventional mortgages do not require CMHC insurance, they have fewer restrictions, such as a minimum credit score requirement. Each lender will have its own set of rules that it must follow.
So, while it is feasible to secure a mortgage with a credit score as low as 600, the number of mortgage lenders ready to approve your mortgage will be relatively limited.
What is considered a good credit score in Canada?
You might be wondering what a decent credit score is.
Credit scores in Canada range from 300 to 900, with very few people falling on either end of the spectrum. The majority of Canadians have credit ratings ranging from 600 to 800.
Credit scores are assigned in increments. Here’s a breakdown of each level to show you how they’re classified.
- A score of 800 or more is regarded as exceptional.
- A score of 720 to 799 is considered excellent.
- You have a decent credit score if it is between 650 and 719.
- The range of 600 to 649 is seen as reasonable.
- A credit score of less than 600 is considered low.
How to Determine Your Credit Score
Long before applying for a mortgage, you should check your credit score and obtain a copy of your credit report. There are a few options for obtaining this information for free. One option is to request a copy of your credit report from the credit bureau directly. I’ll explain how you can do it, but I’ll also explain why I don’t suggest it.
In Canada, there are two major credit bureaus: Equifax and TransUnion. Once a year, both companies are required to provide a free credit report to everyone who requests one. They do, but they don’t make it simple for you.
Other factors to consider when applying for a mortgage
A decent credit score isn’t the only consideration when applying for a mortgage. In fact, it’s the opposite. Mortgage lenders will require proof of your income and employment history, as well as the amount of your down payment and closing costs. Let’s take a closer look at them one by one.
Your income is critical
A strong credit score alone will not qualify you for a mortgage. You must be able to establish a stable job and an income sufficient to cover mortgage payments.
Lenders utilize debt servicing ratios, including Gross Debt Servicing (GDS) and Total Debt Servicing (TDS), to determine whether your income is sufficient (TDS).
Even if you make a lot of money, you might not be able to get a mortgage if your employment history is too recent. Most lenders will not accept your salary while you are still on probation at work. If you are self-employed or have changing income, you will most likely be required to provide two years of income history before you can be authorized. As a result, I don’t recommend changing jobs until you’ve obtained a mortgage. If you don’t have a choice or if the opportunity is too excellent to pass up, you should plan to wait a while before applying.
A solid credit score is essential when applying for a mortgage. Ideally, you should have a credit score of at least 680. If it isn’t, that doesn’t mean you won’t qualify; it just means you won’t be able to access the best lenders and lowest mortgage rates. The good news is that if your credit score isn’t where you want it to be, there are steps you can take to enhance it.
At Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, leave us a message and we will try to connect you with local realtors and sourcing for financing.
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