Your credit score is like a dial — it can turn the rate you’re offered up or down.
Here’s a breakdown of how mortgage lenders gauge your number, and why a higher score can get you better rates.
Looking to buy a home or renew or refinance your mortgage? One of the first things you'll likely stress about is your credit score — and whether it's good enough to secure a great mortgage rate.
Where your score lands can increase the lender's risk of default, so it's true that a good credit score can open more financial doors and unlock better rate offers with a traditional lender.
But life isn't always rainbows and butterflies, so what if your score lands lower on the scale?
Let's examine the WHAT, HOW, and WHY of mortgage lenders and credit scores.
Your credit score is a number assigned by a Canadian credit bureau based on how well you've managed your bills. The two credit bureaus that operate in Canada are Equifax Canada and TransUnion.
Credit scores range from 300 to 900 with Equifax and 300 to 850 with TransUnion. A higher score is the goal. Here are the typical labels applied to scores:
For a mortgage application, a magic score of 680 or more (‘excellent’ and ‘good’ slots) unlocks the best rates with a traditional lender — though other qualifying factors, such as income source and employment history, may impact your rate.
As the scale drops below 'good,' your mortgage rate will likely be higher — about 1 – 6% higher, depending on your details and lender.
Most traditional (prime) lenders require a score of at least 680 for a refinance or 660 for a purchase. However, some may allow exceptions down to 600 on applications where other criteria are strong.
Alternative lenders have varying minimum scores — some may go down to 500, and others may have no minimum requirement, basing the mortgage application on the amount of home equity (or down payment) and the home's location.
Private lenders typically consider only your home equity and the home's location when lending; these rates are usually higher than those of most traditional and alternative solutions.
You can check your credit score for free. Follow these links to start the process.
When you ask about getting a mortgage rate or mortgage, a broker or bank rep will typically inform you when they need to do a hard credit pull (or it may be in the fine print, depending on the online application you filled out).
Note: At True North, we don't pull your credit for a mortgage pre-approval, just for a formal mortgage application.
Multiple hard pulls (e.g. from shopping for a mortgage with different lenders) within a short window are unlikely to further ding your credit score, and your score should recover in about 3 months. But if the pulls keep registering beyond what each credit bureau considers a 'short' period, your score will continue to reduce accordingly.
If you use one mortgage broker to check lenders for you, your credit is usually pulled once to shop among multiple lenders, and is registered as a single inquiry on your credit file.
The score you see in your credit app or account is your Pinnacle score.
However, mortgage lenders actually use a FICO score, a mathematical formula (created by Fair Isaac & Company) calculated by both Canadian credit bureaus, Equifax and TransUnion.
Your FICO score isn't publicly accessible. And be aware that it may differ from your Pinnacle score, though the difference is typically not enough to impact your mortgage application.
It comes down to the increased risk of borrower default that a lender would assume on a mortgage loan.
For example, one of Canada's three mortgage default insurance providers, Canada Guaranty, calculates the historical default risk according to borrower credit score for mortgages with less than 20% down payment, as demonstrated by this graphic:
As you can see, the risk of default rises with each bracket drop in the score. With a credit score below 600, the default potential rises substantially to almost 6% — which is pretty big by lender standards.
That risk doesn't automatically translate into a rate that's 6% higher, but it shows why it could.
No matter what number your credit score is, you can usually apply for a mortgage.
Lower credit scores are often supported by another factor important to mortgage lenders: home equity.
Whether it's built up over months or years of paying down your mortgage or you're coming in with a larger down payment, a lower LTV (loan-to-value) can help offset a lower credit score to help you access a better alternative mortgage rate.
That's because home equity offers a mortgage lender greater security in recovering its funds in the event of default.
You're not alone if you feel intimidated by a credit score. If your score is already in the 'good' range of 680 or over, you don't need to stress about raising it further just to get a mortgage (unless it helps you stress less, of course!).
If you want to improve your score, an expert True North broker can offer strategies, in your preferred language, to help you access a better mortgage rate.
The important takeaway here is that it's helpful to know what lenders look for in a credit score — but it shouldn't define your intentions or prevent you from finding a good solution.
Many alternative and private lenders exist solely to offer mortgages that traditional lenders do not provide. They're an essential part of the mortgage landscape, just like you are in your pursuit of homeownership dreams.
Wherever your score lands on the credit scale, True North Mortgage offers more flexibility than the big banks to find the right lender and best mortgage rate and fit for your situation.
It's something we've been obsessed with for over 18 years, and we have the industry's best score in 5-star client reviews to prove it.
Take a closer look at how your credit works for getting your mortgage approval.
Know before you go (house hunting, that is). Get pre-approved fast, hold your best rate.
Don't fit the mortgage mould? We can help customize your solution.
