In Canada, your credit score plays a primary role in determining whether or not you will get mortgage approval. As such, there are multiple ways in which your credit score affects your mortgage rates and the sects of the application process. Your credit score affects things such as the kind of mortgage you can apply, the rates you will pay, and the amount you can pay for private mortgage insurance. The higher your credit score the better the terms you can get. Read on to discover how your mortgage approval is determined by your credit score in Canada.
Essentially, a mortgage is based on risk-pricing. Lenders tend to increase your mortgage cost for any risk associated with your credit profile. If you have a low credit score, you will pay a higher mortgage rate. For instance, if your credit score is 750, you qualify for a mortgage rate of 3.625%. However, with a credit score of 625, you will get a mortgage rate of 4.125%. The 625 credit score results in a higher monthly payment, meaning that your mortgage will be more expensive than the 750 credit score.
Your credit score also affects the amount you can borrow on a given property. The loan-to-value ratio is the percentage of a property sale price that you can borrow up to. For instance, if you qualify for a 95% loan-to-value, you can borrow $190,000 on a sale price of $200,000. Mortgage lenders have different loan programs that limit how high they can go on the loan-to-value ratio. The higher your credit score the higher your mortgage lender can go on the loan-to-value ratio.
If you have a bad credit history, your mortgage lender can exclude you from certain loan programs. When it comes to conventional financing, you cannot qualify for a mortgage. Moreover, in Canada, you can only get a mortgage if your credit score is above 620. When it comes to non-conforming loans, the situation can be more pronounced. Non-conforming loans are issued by non-agency lenders who can set their own rules. Some of these lenders can leave you ineligible if you have a low credit score.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) insures the lender in case you default your loan. Your credit score can determine the rate you will pay for private mortgage insurance. Most lenders allow you to carry private mortgage insurance if you make a down payment of more than 20% of the purchase price. Lenders who issue PMI consider your credit history when calculating the cost of your PMI.
With these in mind, you now understand why it is crucial to consider your credit score before applying for a mortgage. You can consult with an experienced mortgage broker such as Altrua Financial to know whether you qualify for a mortgage. If you have a bad credit history, they can advise you on how to improve your credit score to qualify for low rates.