Thinking about buying a house? It goes without saying that it’s a big financial decision and one of the most important investments you'll make in your life. Naturally, during the buying-process, you'll likely have a lot of questions, with one of the most common being: what credit score is ideal for purchasing a home?
This question is complex and depends on many factors. So, let's explore the subject in detail to find the answer!
What is a credit score?
Your credit is a numerical measure, ranging from 300 to 900, that reflects your creditworthiness based on your financial behaviour. Essentially, it serves as your financial reputation.
When you apply for a mortgage, lenders use your credit score to assess the risk of lending your money and determine the terms of the loan.
A higher credit score generally indicates lower risk to lenders, which can increase your chances of obtaining a mortgage with favourable interest rates and conditions. Thus, your credit rating plays a crucial role in your ability to navigate the home-buying process effectively.
How is your credit rating calculated?
It's important to know that several factors are taken into consideration when calculating your credit score. In fact, the various pieces of information that make up your credit file greatly influence your score. This information includes
- The age of your credit accounts.
- Your payment history.
- The total amount of debt you owe.
- Your history of credit applications.
- The variety of your credit accounts.
410, 560, 600, 750, 830: what is a good credit score?
You now know what a credit score is, but do you know what the numbers really mean? Although some variations may apply from one professional to another, the credit score scale is typically categorized as follows:
- A score of 579 or less is considered very low.
- A score of 580 to 679 is considered low.
- A score of 679 to 719 is considered average.
- A score of 720 to 779 is very considered good.
- A score of 780 or more is considered excellent.
Understanding these categories can give you a clearer picture of your credit standing and your potential purchasing power.
Also, it's worth noting that the average credit score in Canada typically ranges between 600 and 650, although this can vary based on factors such as age group and regional differences across provinces.
What is the minimum credit score to obtain a mortgage?
As mentioned earlier, your credit score plays a significant role in your mortgage application process as it reflects your financial habits, your ability to repay the loan and your risk profile. That's why, when analyzing your file, your mortgage lender pays particular attention to your score. So, what's the minimum score to be able to secure a mortgage?
According to various experts, although it may vary, the minimum credit score required to obtain a mortgage typically falls between 620 and 680. However, it's important to note that individual lenders may have their own specific criteria. Some lenders may consider applicants with scores as low as 600, while others may require scores of 650 or even 680.
Getting a mortgage: don't overlook the power of a good credit score
Although your bank might approve your application based on a minimal credit score, don’t underestimate the power of a strong credit score. Lenders view applicants with excellent credit as lower risks, which can lead to benefits like:
- Access to the most competitive interest rates on the market.
- Higher borrowing limits for the mortgage loan.
- Greater flexibility in terms and conditions offered.
- A wider selection of mortgage products.
On the other hand, having a lower credit rating may lead to certain disadvantages when applying for a mortgage:
- Potentially facing higher interest rates due to perceived lending risks.
- Limits on the borrowing limit for the mortgage loan.
- Requirements of a larger down payment to mitigate the perceived risk.
- Limited options for mortgage products and less favourable terms.
You don't have a good credit score?
Unfortunately, if your credit rating falls below the minimum required for a mortgage, you might face rejection from traditional lenders. However, it's important not to lose hope! Although you may have to delay your project, your lender will generally advise you to build up your credit and revisit your project once you’ve improved your score.
Exploring alternative options is also a viable strategy. For instance, you could consider working with alternative lenders such as Type B lenders or private lenders.
What concrete steps can you take to improve your credit score?
If you're preparing to buy a home and want to boost your credit score, here are some actionable steps to consider:
- Create and adhere to a realistic budget.
- Pay bills and obligations on time.
- Maintain a healthy credit utilization rate.
- Regularly review your credit accounts.
- Monitor your credit report.
- Limit credit applications.
How long does it take to increase your credit rating?
Although your credit rating can fall rapidly, if you take concrete actions and develop positive financial habits, you may notice significant improvements in just a few months.
With dedicated effort, motivation and clear goals, it's possible to revisit your home-buying plans within a year.
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