✔ Improving your credit score will help you secure a mortgage and get that first home
✔ There are ways to improve your credit score, including lowering debts
✔ If your credit score is lower than you’d like, there are alternate mortgage options
A house is likely the largest purchase you’ll ever make, and buying your first home can be daunting. Mortgage approvals, down payments, closing costs and potential bidding wars - it’s a lot to consider, and the journey goes a lot more smoothly when you’re well prepared. From credit scores to closing day, we’re here to help. Before embarking on your first venture into home ownership, consider these guidelines for getting your finances and credit score into top shape.
New changes as of July 1: CMHC will require at least one borrower on the application to have a credit score of 680 or higher, up from 600. Mortgage default insurance is mandatory if you have a down payment of less than 20%.
Read more about the new criteria for credit score, debt, and the funds accepted for down payment, and how they may affect affordability here.
How much does my credit score matter?
Mortgage lenders will look at your credit score to assess potential risk. They view your credit history as an indication of how well you manage financial responsibility, and how likely you are to pay (or default on) your mortgage loan. Your credit score may also help determine the interest rate and terms of your mortgage. Essentially, the higher your credit score, the better (and more plentiful) your options will be.
Before you get too invested in your credit score and how it will impact the purchase of your first home, ensure that it’s accurate. The vast majority of people have at least one error on their credit report, so it’s worth going over yours in detail and clearing up any inaccuracies. If you plan on buying your first home with a partner, ask them to do the same assessment of their own credit report.
In Canada, credit scores are measured between 300 and 900 (you want yours to be as high as possible). To secure a traditional mortgage through a bank or other major financial institution, you will typically need a credit score of 600 or higher. If you have built good credit over time with minimal blips along the way, you won’t have to worry. However, if you’ve had notable delinquencies or filed for bankruptcy, your credit score will have been damaged and could fall below that line. If you have weak or poor credit, don’t rule out buying a house - it’s still possible, though there may be some caveats along the way.
If your credit score is below 600, there are several mortgage options. First, see if your ideal lender is willing to work with you. This might be possible if you can demonstrate strong earnings, a rising credit score and consistent debt repayment. If you don’t meet mortgage loan criteria through any traditional lenders, consider a subprime or private mortgage. This will cost you significantly more in interest, but may be what you need to get into the housing market. Here are some great tips for getting a mortgage if your credit is less than perfect.
How can I improve my financial situation before applying for a mortgage?
Start by eliminating or reducing debt as efficiently as possible. If you have multiple balances owing, focus on paying down those with the highest interest rate first, then work your way through the list. Ensure that you’re making the minimum payment or higher on any personal loans or credit cards, and consider cancelling any credit cards you aren’t using as this could negatively affect your mortgage application. It can take up to six months for your credit score to improve, so get started well ahead of time and be patient. Buying a house is a marathon, not a sprint!
You’ll also want to save money as consistently and aggressively as possible. Pre-authorized transfers to a high interest or tax free savings account may be a good way to stay on track. The larger the down payment, the stronger your buying power will be - and, the more appealing you’ll be to mortgage lenders. While this advice applies to all prospective home buyers, it’s more critical to those with lower credit scores as a higher down payment (often 20-25% or more) may be required to offset potential risk on the part of the lender.
Whenever possible, it’s best not to apply for any other new credit in the months before you apply for a mortgage. For example, avoid applying for new credit cards or car loans prior to your mortgage application. Potential lenders will see these open applications, including any rejected applications, and it may influence their decision.
What else should I know before buying my first house?
No matter how strong your financial situation is, it’s important that you’re ready to take on a mortgage and the costs associated with home ownership. Go into this transaction with eyes wide open. Look into mortgage insurance, estimated realtor fees, property taxes, home maintenance costs and more before committing to a purchase. Shop around for the best interest rate available to you. While we’d all love to own our dream home, nobody wants to be house poor. You don’t need to cancel your home ownership plans if things get overwhelming - instead, try scaling back until you’ve reached a budget you’re comfortable with. With proper research and planning, you can find a home and a mortgage that suits your family.
We are here to help you buy your first home
While easyfinancial isn’t a mortgage lender, we’re here to offer financial resources and advice as needed. After all, we’re on your team and we want to see you get that first home! If you’d like to speak to someone about your financial needs, please contact your easyfinancial branch or easyhome branch, or give us a call at 1-888-502-3279. As always, we are here to help.