We can’t emphasize enough how important it is to know your credit score before you apply for a mortgage. In order to qualify for certain mortgage products, a minimum credit score is essential. By planning ahead, this gives you time to fix any errors and possibly raise your score if it is below average. This could potentially put you in a higher credit score range and bring with it lower mortgage rates.
Here is a quick summary of how different credit score ranges are viewed by most mortgage lenders:
Credit Scores of 720+
Whether a borrower has a score of 720 or 820, they generally have the same access to the best mortgage rates, so long as they have sufficient provable income and meet common lending criteria.
Credit Scores of 650 – 720
This is where rates start to vary for borrowers. If your credit score falls in this range, you can often expect to have access to only the second – or third – best mortgage rates available on the market. That is especially true if your score is below 680.
Credit Scores of 600 – 649
Rates increase incrementally more for borrowers with a credit score in this range. That’s because many lenders start to view them as “fringe borrowers”.
Credit Scores Under 600
Those with a credit score under 600 would generally be considered “non-prime”. Folks in this category are not able to access the attractive mortgage rates you generally see advertised. Most non-prime rates run about one to two percentage points (100 – 200 bps) higher than prime rates. Although, people with serious credit issues, an inability to prove enough income or the need for a second mortgage, could pay much more.
To put this in perspective, let’s use a conventional 5-year fixed rate of 2.74% for a well-qualified borrower as an example. A non-prime borrower would have to pay 3.99%, give or take, for the same term.
On a $300,000 mortgage with a 25-year amortization, that would amount to $196 more in monthly payments, or a total of $17,770 additional interest over a five-year term. After considering the effects of compounding, paying that much more would make a noticeable dent in the average Canadian’s retirement savings.
Lenders also use your credit score to help determine your maximum allowable debt ratios when underwriting your mortgage.
For example, if your score is:
Under 680 – your maximum Gross Debt Service Ratio (GDSR) would be 35% and your maximum Total Debt Servicing Ratio (TDSR) would be 42%
Over 680 – your maximum GDRS would be 39% and your maximum TDRS would be 44%
To put it quite simply, those with a higher credit score tend to get rewarded with more borrowing flexibility.
Improving Your Credit Score at Renewal
While having a strong credit score is helpful when applying for a new mortgage, homeowners with weak credit and an existing mortgage should also take heed. Those facing a renewal in the next 12 – 18 months must prioritize improving their credit score.
“If you are with a private or alternative lender and coming up to your renewal date, the higher your credit score, the better”. Notes credit expert Ross Taylor. Particularly with weak-credit borrowers, mainstream lenders want to see they’ve learned their lesson and rehabilitated their credit.
He points out that even simple reporting mistakes can work against you. A payment improperly recorded as late by a creditor can keep your score artificially low…costing you thousands more in interest.
“Ridding your credit score of … errors is critical to restoring your credit health and securing the best possible terms for your mortgage renewal.” And, you can only do that if you check your credit regularly.
Do you have questions about your credit score and how it impacts mortgage rates? Talk to one of our trusted Winnipeg Mortgage Brokers to learn more – 204-928-7722.