When you apply for a mortgage, you’re asking a bank to take a significant risk on your behalf. Think about it — if you buy a house for $500,000 and have 20% ($100,000) to put down, you’re asking the bank to pay the other $400,000 for you. You will end up paying the bank back — and end up paying about $1 million all told for your house — you’re also getting access to $400,000 that you didn’t have in the first place.
This is why applying for a mortgage involves so much paperwork — and so many questions. If you want to qualify for a mortgage in Canada, there are four general factors that lenders consider: credit history, stable income, the down payment you have on hand, and affordability of the loan for you. In the area of credit history, Canadian lenders use scores from TransUnion and Equifax, two credit reporting agencies. If you don’t have 20% to put down on the loan, and you’ll be taking out what’s called a “high ratio” loan (meaning you’re borrowing more than 80% of the purchase price) you have to have a credit score of at least 600 from both bureaus. A recommended 24 months of credit history reporting with at least 2, but preferably 3 trade lines / accounts. If you want a 5% cash back mortgage, in which that 5% is credited to your down payment — or if you are borrowing your down payment from another source, such as a relative or friend, then you need to have a credit score of at least 650.
When you start looking for a mortgage, you’ll deal with a broker who will take a look at your credit history. If you have at least the minimum requirements for a mortgage, then you can start looking at the pre-approval process. If not, the broker will point you in one of two directions: helping you take steps to improve your credit score or (if you have a large enough down payment) referring you to a private lender to get your first mortgage started while you take steps to improve your credit score before that first mortgage comes due for renewal.
Determining if you have a Good Credit Score
When it comes to a “good credit score” mortgage, you need to have a score of at least 680 from both bureaus and a satisfactory credit history. If you have both of these in place, then you can qualify for interest rates that are significantly lower, no matter what term you want to have for your loan.
What if you have a solid income but can’t qualify for a loan? This usually happens because of one of three different scenarios. One involves a successful person who is self-employed, such as a dentist who owns some or all of a practice, or a novelist. He might be raking in a lot of money each year, but it’s not necessarily going to come in like a regular salary, which means that it could stop at any time (at least from the perspective of the bank).
A second scenario involves a person who went through financial difficulties in the past but now has a solid job with a high income. However, payment issues in the past mean that he still has a low credit score, and so he can’t get approval. A third scenario is someone fresh out of college who has a high income but hasn’t built up enough of a credit history. Both of these applicants can have a difficult time dealing with the banks.
If you’re in the first scenario, it’s important to have a solid credit history — a history of paying things like car notes and credit cards on time. Also, having bank statements showing a solid history of maintaining the liquidity to pay the mortgage helps. For people with little or no credit history — or who are repairing their credit — getting rid of negative items on the credit report is key. Sometimes this involves challenging erroneous items, and at other times this involves paying off old items to get them off the report. People who have no credit history should open a credit card or two — but then pay the balances off each month.
If you have questions about your own credit situation, call Amansad Financial Services. We will review and make some recommendations as to what you should do to optimize your mortgage application.