If you’re looking to get a new mortgage, keep reading!
As covered in our Guide to Buying a Home, how much mortgage you can afford is based on your income, your downpayment and your credit score. Credit scores are calculated by an algorithm made up of 5 things. We’ve listed them below in the order of importance
35% Your payment history
30% Your average credit utilization (balance outstanding divided by credit limit)
15% The length of your credit history
10% Public records (ex: bankruptcies, consumer proposals, collections, etc)
10% Number of credit inquiries
You can read more about your credit score calculation in this Equifax article.
The first thing you need to understand about credit inquiries is there's a difference between a "hard" pull and a "soft" pull. A "soft" pull occurs when you use a credit monitoring service like Credit Karma or Borrowell. This doesn't affect your credit score. A "hard" pull is an inquiry made by a loan provider and your consent is required. Contrary to popular belief, having your credit pulled by multiple loan providers to enable you to shop around doesn’t wreck your credit score and is counted into one credit inquiry. You can read more about hard inquiries and how they’re treated here.
So why does your credit score factor into qualifying for a mortgage? Someone with a higher credit score is less likely you are to default. In fact, there's a proven inverse relationship between higher credit scores and default rates. This means the higher your credit score, the less risky you are to the lender from a repayment standpoint and as a result you get better rates.
In Canada, your credit score is usually obtained through two providers: Equifax or TransUnion. Credit scores range from 300 to 900, with the highest score (900) being the best you can possibly have and industry estimates put the average credit score around 650. You would assume that a higher credit score should always result in a better the rate, but it’s not that simple. In the graph below, the brackets underneath the scale demonstrate what credit score range you typically need to qualify for that kind of mortgage option.
*Mortgage rates are based on market rates at the time of writing this article. For current rates, refer to our rate page.
As you can see above, your actual credit score is not as important as the category you fall into. Someone with a 660 credit score could get the same mortgage rate as someone with a 900 credit score. It’s like the joke “What do you call the medical student who graduated with the lowest grade? Doctor”. In this case, the important thing for insurable mortgages is that you have the minimum credit score to be insurable, anything above that doesn't materially affect the outcome.
The reason lender minimums fluctuate between 600 to 660 is that lenders are free to set a threshold higher than they’d like to (and most do) if they feel that 600 is too low. So if you have a credit score in the 600-660 range, you can still get a mortgage you may just have less lenders you can work with. Luckily, Mortgauge works with over 20 lenders which means we have options for everyone. Here’s how your credit score affects the options you have available:
*The mortgage rate impact depends on which lenders have the best offers, which is constantly changing.
In order to pre-approve you, your mortgage representative will need to pull your credit to get your credit score and verify your debts outstanding. Many people try to avoid pulling their credit early on, but we’d strongly recommend that you do.
As discussed, the number of credit inquiries makes up a very small percentage of your score and the negative impact of pulling your credit is just a few points (which typically come back within a month or two). However, if your mortgage representative knows your credit score upfront they are best equipped to help you in the following ways:
So what does this mean for you? Losing a few points on your credit score is nothing compared to the potential downside of not being informed from the beginning. Each lender will have different restrictions in addition to your credit score, which your mortgage professional will be able to identify and discuss with you as part of your pre-approval.