What credit score do you need to unlock lower mortgage rates?

The WHAT: Credit Score Scale

What is a credit score?

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.

What does your score mean for your mortgage rate?

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:

• Over 760 – Excellent
• 760-680 – Good
• 680-620 – Adequate
  
• Under 620 – Below Average

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 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 to 6% or more, 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 will typically only consider your home equity and home's location to lend; these rates are usually higher than most alternative solution rates.

The HOW: How do mortgage lenders get your credit score?

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).

• A soft pull doesn't affect your score, such as when you check on your own credit score.
• A hard pull is a full credit inquiry that appears on your credit report when you officially apply for a mortgage or other credit product, which can temporarily lower your score by about 10 points (considered a minimal effect).
  

Note: At True North, we don't pull your credit for a mortgage pre-approval, just for a formal mortgage application.

Can multiple credit checks impact your score?

Multiple hard pulls (e.g. from shopping for a mortgage with different lenders) within a short enough window may not further ding your credit score and it should recover in about 3 months. But if registered beyond what each credit bureau considers a 'short' period, your score will reduce accordingly.

If you use one mortgage broker to check the lenders for you — your credit is usually pulled once to shop multiple lenders, registered as only one inquiry on your credit file.

Do mortgage lenders use the score you see?

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. It may differ from your Pinnacle score, though this difference is typically not enough to impact your mortgage application.

The WHY: Why are rates higher with a lower credit score?

It comes down to the increased risk of borrower default that a lender would take on for the mortgage loan.

For example, one of Canada's three mortgage default insurance providers, Canada Guaranty, calculates the historical default risk by 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 you why it could be.

Your credit score counts. But what can also count? Your home equity.

No matter what number your credit score is, you can apply for a mortgage.

Lower credit scores can be supported by another factor important to mortgage lenders: home equity.

Whether it's built up from 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 your lower credit score for accessing a better alternative mortgage rate.

That's because home equity offers a mortgage lender more security in getting back its money in the event of default.

Your score, your rate — your best mortgage fit.

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!).

The important takeaway here is that it's good to know what a lender is looking for in a credit score — but it shouldn't define you or prevent you from looking for a good solution.

Many alternative and private lenders exist solely to offer mortgages beyond what traditional lenders supply. And they're an essential part of the mortgage landscape, just like you are in trying to reach your homeownership dreams.

Wherever your score lands on the credit scale, True North Mortgage has 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.