A credit score is crucial in almost every part of your finance in Canada. It is one of the essential factors lenders use in evaluating your loan application. When it comes to getting a house, a credit score’s importance cannot be undermined as most lenders use it to review your financial behavior.
Not only does your credit score influence your qualification for a house, but it also impacts your interest rates, down payment requirements, and other terms of the house. Still unsure what credit score you need to get a house in Canada? Let’s take a look at what credit score is required for a home in Canada.
What Credit Score is Needed for a House in Canada?
Generally, there is currently no set credit score that can guarantee you mortgage approval in Canada. Every lender in Canada has its credit score requirement.
However, most lenders approve an application with a good credit score rather than those with a bad credit score. A bad credit score connotes that you might not be able to repay the loan.
However, with a credit score of about 620, you’ll be able to buy a house in Canada. It is better to have a higher score of 740 and above, as that will help you get the lowest interest rates. The average credit score you’ll require to buy a house in Canada will depend on your lender and the loan type. Most conventional loans accept an average score of 620.
Regardless of the loan type, they are insured by government organizations. Hence, lenders cannot approve borrowers with credit scores below the average these organizations set.
How Credit Score Influences Buying a House
As mentioned above, credit scores impact almost every aspect of our finances. With a lower credit score, banks and financial institutions are less likely to approve your mortgage loan.
Even with a good score, your lender might still have to consider other factors before approving your application. Your credit score generated by your lender can vary from the one issued to you by a credit bureau.
Instead of applying directly for a house, you can go for pre-approval. Pre-approval is the process where you provide details like proof of employment, assets owned, current debts, and other obligations to a potential lender.
The lender will then review all information and estimate how much you can borrow. Alongside this estimate, the lender will also provide an interest rate, payment plans, etc., to let you know how much you can afford to spend buying a house.
Your credit score also plays a significant role in the pre-approval process. It helps a potential lender know if you’re a loan risk. Once you’re clear at the pre-approval stage and get a letter, you still need to apply for a house. Your application will be approved once the actual value of assets has been assessed. Other elements come to play in this stage. Some of these factors include:
- Current income
- The current level of debt
- Employment history
- Assets owned
- The property for which the mortgage is taken
Average Credit Score Requirements for a House
The average credit score requirement for a house in Canada depends on the institution and insurer. The Canada Mortgage and Housing Corporation (CMHC) has an average credit score of 680. This score is applicable if you’re putting a down payment of less than 20% for the house.
On the other hand, private insurers have a less strict credit score requirement. They mostly use a loan-to-value ratio of your house. Generally, if you’re making less than a 20% down payment, you should have a minimum credit score of 680. While if you’re making a down payment of over 20%, you should have a minimum credit score of 600.
Your credit score can go as high as 720 to better your chances. Note that any score beneath the minimum credit score mentioned above would decrease your chances of getting approval.
Getting a House with a Low Credit Score
All hopes of getting a house in Canada are not lost if you have a low credit score, although it might be difficult. Generally, banks do not compromise on their set rules; hence, you’ll have to seek alternative lenders. Below are some institutions that can consider your application even with a low credit score:
- Credit unions
- Trust companies
- Sub-prime lenders
Alternatively, if your credit score is too low, you can apply jointly with someone with a better credit score. This is acceptable by the CMHC as their requirements state that any borrower should have a credit score higher than 680.