Your Credit Score and Your Mortgage: What Lenders Look At

Your credit score is one of the first things a mortgage lender checks, and it can decide whether you qualify and the rate you are offered. Here is how Canada's two credit bureaus score you, what the mortgage insurers require, and what to do in the months before you apply.

The short version

Canada's two credit bureaus

Equifax and TransUnion each keep a credit report on you, built from what lenders send them, and calculate a score from it.

• Scores usually run from 300 to 900. Higher is better. Equifax describes 660 to 724 as good, 725 to 759 as very good and 760 and up as excellent, but TransUnion notes that each lender decides what it considers a good or poor risk.
• Your report starts with your first credit. It begins when you first borrow or apply for credit, covers only credit you use in Canada, and is updated at least once a month.
• There is no single score. The bureaus and lenders use different formulas, so the score you see may not be the one your lender sees.
• What's on it. Your credit cards, loans, lines of credit and mortgage, with balances and payment history, plus collections, bankruptcies and lender inquiries.

What lenders do with your score

Lenders use your report and score to decide whether to lend to you and at what interest rate, and the Financial Consumer Agency of Canada says good credit history may get you a lower mortgage rate.

The score is a starting point, not the whole decision. Federal guidelines tell banks to look into your credit history and borrowing behaviour rather than rely on a score alone. Your report also feeds your debt ratios: for an insured mortgage, CMHC counts card and unsecured line of credit balances as a monthly payment of at least 3% of the balance, so $10,000 owed counts as at least $300 a month. If your total debt ratio is the limit that decides, that can cut what you qualify for by about $45,000, at an example qualifying rate of 6.5% over 25 years. I explain the ratios in How Much House Can You Afford?

What the mortgage insurers require

With less than 20% down, you typically need mortgage loan insurance, and a lender may require it even with 20% down if you have a poor credit history. Each insurer has its own credit rules on top of your lender's:

• CMHC: at least one borrower or guarantor needs a score of 600 or more. CMHC may consider other ways of showing you are creditworthy if you have no credit history.
• Sagen: at least one applicant needs a score of 600 or more.
• Canada Guaranty: its published guidelines set no minimum score. They weigh how old, frequent and serious any problems are, and after a serious one they generally want two years of rebuilt credit, with at least two active accounts and no late payments.

Under Canada Guaranty's guidelines, you may be considered two years after a bankruptcy discharge or a completed consumer proposal. Judgments, tax liens and collections must be paid in full before closing, and more than one bankruptcy, or a past foreclosure, makes you ineligible. If you plan to borrow your down payment, CMHC and Canada Guaranty both look for a strong credit history.

What moves your score

The bureaus don't publish their formulas, but the Financial Consumer Agency of Canada lists the common factors, and TransUnion says payment history is typically the most important.

• Missed or late payments, debts sent to collection, and any insolvency or bankruptcy.
• How much of your limits you use. Try to stay under 30% of your total credit limit, even if you pay in full each month. On $10,000 of total limits, that is under $3,000.
• How long you've had credit, and how long each account has been open. Keeping older accounts open can help.
• The types of credit you use. Lenders like to see that you can manage more than one kind.
• How often you apply. Many applications close together can look like you urgently need credit.

Negative information fades with time. Late or unpaid accounts stay up to 6 years. A bankruptcy usually comes off 6 years after discharge in BC, or after 14 years if you have been bankrupt more than once. A consumer proposal comes off 3 years after you pay it off or 6 years after you sign it, whichever comes first.

Hard and soft checks while you shop

• Checking your own report or score is a soft inquiry and doesn't affect your score.
• Applying for credit, including a mortgage, creates a hard inquiry. It can affect your score, and anyone who views your report can see it. Equifax keeps inquiries for 3 years and TransUnion for 6.
• Shop in a short window. The Financial Consumer Agency of Canada suggests getting mortgage quotes from different lenders within 2 weeks; the credit bureaus treat them as one inquiry.
• Consent. In BC, a lender needs your consent before it checks your credit. Signing a credit application gives it, usually for as long as the account stays open.

A pre-approval usually includes a credit check, so it pays to know where you stand first. I cover the rest of that step in Why Mortgage Pre-Approval Matters.

Getting your reports and fixing errors

Both bureaus give you your credit report for free, online, by mail or by phone (Equifax 1-800-465-7166, TransUnion 1-800-663-9980). Equifax includes your score at no charge. TransUnion's free report includes a score only for residents of Ontario and Quebec, though some other companies show a score for free.

Look for a wrong address, accounts you don't recognize, payments marked late that you made on time, and old items that should have dropped off. If you find an error:

• Dispute it with each bureau that shows it, using its forms and your proof. The bureau checks with the lender and corrects confirmed errors free, and you can also ask the lender to correct what it reports.
• If the lender stands by it, it stays. You can ask for a higher level of review, and add a free statement of up to 100 words explaining your side, which anyone who views your report will see.
• Get help. The federal government doesn't regulate credit bureaus. In BC, Consumer Protection BC oversees the rules on what can go in your report and who can see it, and the Office of the Information and Privacy Commissioner may help once you have been through the bureau's process.

Building credit as a newcomer or young buyer

• Start with one card. A secured credit card may suit you if you have no credit history, for example as a newcomer. You give the issuer a deposit of anywhere from a few hundred to a few thousand dollars, and your limit is normally at least that amount. Student cards usually have lower limits.
• Use it lightly and pay on time, ideally in full, and keep the account open. Add other credit only when you need it; phone, internet and utility accounts can show up on your report too.

Thin credit isn't always a barrier. CMHC may consider other ways to show creditworthiness, and Canada Guaranty may accept 12 months of rent payments plus one other regular payment or documented savings, if you are a Canadian citizen or permanent resident. Some lenders also look at a credit report from another country, and with less than 20% down, a guarantor with a score of 600 or more can meet CMHC's minimum. I cover the newcomer programs in Buying a Home in BC as a Newcomer to Canada.

Before you apply

• A few months out, get both reports, dispute any errors and set up payment reminders.
• Pay down card and line of credit balances. It helps both your score and your debt ratios.
• Hold off on new credit, such as a car loan or store financing, until your purchase completes.
• Be ready to explain past problems. Lenders may ask you to explain serious ones, such as a bankruptcy.

Questions buyers often ask me

What credit score do I need to buy a home in Canada?

With less than 20% down, CMHC and Sagen need at least one borrower with a score of 600 or more, and Canada Guaranty publishes no minimum. With 20% or more down, each lender sets its own standard, and good credit history may get you a lower rate.

Will a mortgage pre-approval hurt my credit score?

A lender's credit check is a hard inquiry, which can affect your score. If you get quotes from several lenders within two weeks, the credit bureaus treat them as one inquiry.

Does checking my own credit score lower it?

No. Checking your own report or score is a soft inquiry and doesn't affect your score. Both bureaus give you your report for free.

How long does a late payment stay on my credit report?

Up to 6 years. A bankruptcy usually stays 6 years after discharge in BC, or 14 years if you have been bankrupt more than once.

Can I get a mortgage with no credit history?

Often, yes. CMHC may consider other ways to show creditworthiness, Canada Guaranty may accept 12 months of rent plus another regular payment from citizens and permanent residents, and a guarantor can help. A secured credit card is one way to start.

Getting ready to buy? See which programs you can use in First-Time Home Buyer Programs in BC, try my mortgage calculator, and read From Offer to Keys.

This article is general information, not financial advice, and your lender and insurer make the final decision. The credit bureau, insurer and federal details come from their own published pages and were current at the time of writing. For the federal guide, see getting your credit report and credit score.