Mortgage lenders consider a borrower’s credit score as one of the primary factors when determining whether to provide a mortgage or not, and will have a range of specific credit score requirements that must be met. However, this does not mean that those without exemplary credit scores are unable to obtain mortgages; at YMYW, we canvas over 40 banks and lenders to find the best option for you.
Understanding your credit score
In Canada, credit scores range from 300 to 900, with an average score of 650, though older Canadians tend to have higher credit scores than their younger counterparts. A score of 660 is considered the beginning of “good” credit, and so anything above this will be looked at favourably by lenders. Your credit score is tracked and based on information sent to credit-reporting agencies, known as credit bureaus, by companies that issue you credit cards, such as banks, retailers, credit unions, and other financial institutions; there are two credit-reporting agencies in Canada, namely Equifax Canada, and TransUnion. It is worth obtaining a copy of your credit report regularly to ensure that it is accurate, and you are managing your credit well. While the two agencies will have their own algorithms for calculating your credit score, it will be based on factors such as past payment history, credit utilisation, credit history, new credit requests, and types of credit. Consequently, to improve your credit score, you should take actions, such as using two credit facilities, making payments on time, using under 35% of your available credit, establishing a long credit history, and limiting how often you apply for credit.
Lenders based on your credit score
Prime A lenders, such as major banks and credit unions, will be keen to offer mortgages to those with credit scores of 700 and over, and will consider those in the 600-700 range, but the other aspects of the application will have to be very strong in such cases.
B lenders, such as Home Trust, Canada Western Bank, and ICICI Bank will be willing to lend to those turned down by A lenders, with credit scores in the 550-700 range. They will offer higher interest rates and require a minimum down payment of 20%. The term of the mortgage will likely be in the one to two year range, as the goal for a borrower will be to improve his/her credit score during this period, and refinance with an A lender as soon as possible.
Should a borrower not be able to obtain a mortgage from either an A or a B lender, a third option is a private lender. A private lender is a private organisation or individual that lends money for mortgage purposes but is not backed by a bank or other financial institution, and will consider credit scores of below 600. They are typically considered a temporary fix before a borrower is able to transition back to a more typical mortgage lender, and as such tend to operate with short terms, higher interest rates, and other fees.
At YMYW, we work with A, B and private lenders so that our clients with lower credit scores are also able to obtain secure, affordable mortgages that meet their needs, while avoiding the higher interest rates and fees of private lenders.
Bankruptcy and getting a mortgage
A lenders require that a borrower has been discharged from bankruptcy for at least two years and one day, and have at least one year of re-established credit, along with a range of other criteria to consider him/her for a mortgage. B lenders, on the other hand, require the discharge to have occurred only within the previous three to twelve months. Private lenders require no specific period post-discharge or any re-established credit, but will offer high interest rates, require a significant down payment, and charge percentage fees.
One way to avoid a bankruptcy is a “consumer proposal,” which is a legally binding debt settlement agreement, filed with a Licensed Insolvency Trustee, to repay your creditors a percentage of what you owe in exchange for full debt forgiveness; it is the only such agreement recognised by the Canadian government, and has less stringent regulations than a bankruptcy.
Should your creditors agree to the proposal, you will be able to clear your debt and achieve a higher credit score more quickly than if you went into bankruptcy; this may make you eligible for a mortgage with an A lender, though the options of B lenders and private lenders will still be available should your credit score not have rebounded.
Low Credit, Low Income, High Debt.
Borrowers often do not realize the lenders with which they are eligible to deal, and so apply for mortgages in the wrong places. At YMYW, we search the marketplace for the best options to ensure you do not overpay, and lock in a full-feature mortgage that supports your unique needs.