Credit Score and History: Impact on Your Mortgage

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Credit Score and Credit History: Their Role in Mortgage Qualification

Your credit score is much more than a simple number: it is a summary of your financial behaviour that directly influences your access to mortgage financing and the terms you will be offered. In Canada, the two main credit agencies, Equifax and TransUnion, compile data transmitted by your creditors to generate a score ranging from 300 to 900. The higher your score, the lower the risk you represent to the lender, which translates into better rate conditions and easier qualification.

Mortgage Lender Credit Score Thresholds

A-Lenders: Chartered banks, credit unions (Desjardins), and monoline lenders that offer the best interest rates. They generally require a minimum credit score of 620 to 680, and the most favourable conditions are reserved for scores of 720 and above. For an insured mortgage, the minimum score is typically 680.

B-Lenders (Alternative): Lenders that accept applications declined by A-lenders due to credit issues, non-traditional income, or atypical properties. They accept scores starting around 500, but interest rates are 1% to 3% higher than A-lender rates, and lender fees of 1% to 2% of the borrowed amount are often charged.

Private Lenders: Lenders of last resort that finance primarily based on the property value (equity) rather than the borrower's credit. Rates range from 8% to 15% and fees are substantial. This option is generally temporary, allowing time to rebuild credit and access an A or B lender.

Factors That Influence Your Credit Score

Payment history (35% of the score): the most important factor. Any delinquency of 30 days or more is reported to credit agencies and can drop your score by 50 to 100 points. A single missed mortgage payment can have a devastating impact.
Credit utilization (30%): the ratio between your credit balances and your available limits. A utilization rate below 30% is recommended. A borrower using 90% of their credit limits will be penalized even if all payments are made on time.
Length of credit history (15%): the longer your history, the better. Avoid closing your oldest credit accounts, as this shortens your average history.
Credit mix (10%): a combination of revolving credit (credit cards) and installment credit (car loan, line of credit) is viewed favourably by the agencies.
New credit inquiries (10%): each credit application ('hard inquiry') is recorded and may slightly reduce the score. However, multiple mortgage inquiries within a short timeframe are grouped together.

Strategies to Improve Your Score Before a Mortgage Application

Check your credit report: Obtain your report free of charge from Equifax and TransUnion. Identify any errors (accounts that do not belong to you, inaccurate balances, incorrectly reported delinquencies) and dispute them in writing. Corrections can take 30 to 60 days.
Reduce your credit card balances: Bring your balances below 30% of each card's limit. If possible, aim for under 10%. This measure can improve your score by 20 to 50 points within one to two billing cycles.
Automate your payments: Set up automatic payments for all your accounts to eliminate any risk of missed payments. Even a small forgotten payment on a phone account can hurt your score.
Avoid new credit applications: In the 6 to 12 months before your mortgage application, limit credit card, car loan, or financing applications. Each application generates a hard inquiry on your file that can reduce your score.
Keep old accounts active: Do not close your oldest credit cards, even if you do not use them frequently. The age of your history contributes positively to your score. Use them occasionally for small purchases.

Frequently Asked Questions

What is the minimum credit score needed to get a mortgage in Canada?

For a mortgage insured by CMHC, Sagen, or Canada Guaranty, a minimum score of 680 is generally required. For a conventional mortgage with an A-lender, the minimum score ranges from 620 to 680 depending on the lender. Alternative (B) lenders may accept scores starting at 500, but interest rates will be higher.

How can I improve my credit score before applying for a mortgage?

Pay all your bills on time, reduce your credit card balances below 30% of the available limit, avoid closing old credit accounts, limit new credit applications in the 6 to 12 months before your mortgage application, and check your credit report to correct any errors. A significant score improvement can take 3 to 6 months.

Does a past bankruptcy prevent me from getting a mortgage?

Not necessarily, but it complicates qualification. After a first discharged bankruptcy, the notation remains on file for 6 to 7 years depending on the province. A-lenders generally require the bankruptcy to have been discharged for at least 2 years and that the borrower has re-established credit with at least 2 active credit sources since discharge. B-lenders may be more flexible.

Do multiple credit inquiries affect my score?

Yes, credit inquiries ('hard inquiries') can reduce your score by a few points each. However, Canadian credit agencies treat multiple mortgage inquiries made within a 14- to 45-day window as a single inquiry, recognizing that consumers are rate shopping. Avoid applying for credit cards or car loans in the months leading up to your mortgage application.

What is the difference between Equifax and TransUnion for my credit score?

Equifax and TransUnion are the two credit reporting agencies in Canada. Each may have slightly different information since not all creditors report to both agencies. Your score may therefore vary between the two. Mortgage lenders typically check one or both agencies. It is recommended to check your report with both before submitting a mortgage application.