Minimum Credit Score

In Canada, credit scores play a crucial role in determining eligibility for a mortgage. Lenders use credit scores to assess a borrower’s creditworthiness and the risk involved in lending to them. While each lender has its own specific criteria, there are certain minimum credit score requirements that are generally followed, particularly for insured and conventional mortgages.

Credit Score Ranges in Canada

Credit scores in Canada are typically calculated by the two main credit bureaus: Equifax and TransUnion. The credit score range is from 300 to 900, with higher scores indicating a stronger credit history. Here’s how the scores generally break down:

1. Excellent (800 to 900)

A score in the Excellent range indicates that you are a very low-risk borrower. This is the highest tier, and it suggests that you’ve consistently managed credit well, with a solid history of making on-time payments, keeping debt levels low, and maintaining a strong mix of credit.

• What it means for you: You qualify for the most favorable rates and conditions, and you’re seen as a prime candidate for credit or mortgage approval.

2. Very Good (740 to 799)

A Very Good credit score also signals low risk to lenders, though it’s slightly less optimal than the Excellent range. It shows that you’ve maintained solid credit habits—paying bills on time, keeping credit balances manageable, and avoiding excessive debt.

• What it means for you: Lenders will likely see you as a trustworthy borrower, and you’ll have access to many of the same financial products and advantages as someone with an Excellent score.

3. Good (660 to 739)

A Good credit score is considered acceptable by most lenders. It suggests that you have a positive credit history, but there might be a few instances of missed payments, higher debt levels, or a shorter credit history. You’re still in a solid position, but you may not receive the very best rates available.

• What it means for you: You’re likely to be approved for credit but may face slightly higher interest rates. It’s a good idea to continue managing your credit responsibly to improve your score into the higher ranges.

4. Fair (560 to 659)

A Fair credit score indicates that you may have some past credit issues or higher debt levels relative to your income. This range signals to lenders that you’ve had occasional trouble managing credit, such as late payments or higher credit utilization, which might make you a moderate risk borrower.

• What it means for you: While you can still access credit, you might struggle to get approved for the best financial products. If possible, consider working to improve your credit score to avoid paying higher rates.

5. Poor (300 to 559)

A Poor credit score indicates high risk to lenders. This range suggests that you may have missed multiple payments, have high credit utilization, or may even have experienced defaults, bankruptcies, or collections. Your credit history is likely problematic, and lenders may see you as someone who could struggle to repay loans.

• What it means for you: You’ll face significant barriers when applying for credit or loans. If you can, it’s essential to focus on repairing your credit score over time by addressing missed payments, reducing debt, and ensuring timely payments.

Minimum Credit Score Requirements for Mortgages

1. Insured Mortgages (with Mortgage Default Insurance)

These are mortgages where the borrower has a down payment of less than 20%. CMHC, Canada Guaranty, and Sagen (formerly Genworth) provide mortgage insurance for high-ratio mortgages. Lenders usually require mortgage insurance when the borrower’s down payment is less than 20%.

• Minimum Credit Score:
  • The minimum credit score for an insured mortgage is generally 600.
  • A score of 600 or higher is typically required to qualify for mortgage insurance through CMHC, Canada Guaranty, or Sagen.
  • While 600 is the official minimum, many lenders prefer borrowers to have a credit score of 650 or higher to increase the likelihood of approval and get better rates.

2. Conventional Mortgages (without Mortgage Insurance)

For conventional mortgages, which are for borrowers with a down payment of 20% or more, no mortgage insurance is required. This type of mortgage generally comes with more favorable terms, but the borrower needs to have a higher credit score.

• Minimum Credit Score:
  • The typical minimum credit score for a conventional mortgage is 620 to 650.
  • Some lenders may accept a credit score as low as 620, but the rates and terms may not be as favorable, and the approval might be subject to more stringent conditions (such as a larger down payment or a lower debt ratio).
  • Borrowers with scores below 650 may still be able to get approved, but they’ll likely face higher interest rates and stricter conditions.

3. Alternative Lenders (Non-Bank Lenders)

Alternative lenders (like credit unions, trust companies, or private lenders) may have more flexible criteria and could be willing to work with borrowers who have lower credit scores.

• Minimum Credit Score:
  • Some alternative lenders might accept a credit score of 550 to 600 for high-ratio (insured) or even conventional mortgages, depending on the borrower’s overall financial situation (income, down payment, etc.).
  • These lenders generally charge higher interest rates because of the increased risk.

Factors That Influence Credit Score Requirements

While minimum credit scores are a key part of mortgage approval, lenders will also consider other factors such as:

1. Down Payment:
   1. A larger down payment may offset a lower credit score, especially for conventional mortgages. For example, a borrower with a credit score in the mid-600s might still qualify for a conventional mortgage with a 20%+ down payment.
2. Debt Service Ratios:
   1. Lenders will evaluate your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to determine how much of your income goes toward housing costs and other debts. Even with a lower credit score, a borrower with a strong debt service ratio could still qualify for a mortgage.
3. Employment and Income Stability:
   1. Lenders will assess the borrower’s income and job stability. Those with stable, high incomes might be able to offset a slightly lower credit score.
4. Recent Negative Marks on Credit:
   1. Even with a minimum credit score of 600, lenders will look for recent negative marks such as missed payments, collections, bankruptcies, or foreclosures. A borrower with a good history of handling debt over the past couple of years might have more success even if their credit score is near the minimum threshold.
5. Loan Size and Property Type:
   1. Lenders might have different criteria for various types of properties (e.g., single-family homes vs. multi-unit properties). If the loan amount is higher, the borrower might need a higher credit score.

Improving Your Credit Score for a Better Mortgage

If your credit score is near the minimum requirement, it’s a good idea to work on improving it before applying for a mortgage. Here are some tips:

1. Pay Bills on Time

• Why it matters: Your payment history is the single most important factor in determining your credit score (it accounts for 35% of your score). Every time you miss a payment or are late on a bill, it can negatively impact your score.
• How to do it: Make sure you pay your credit cards, loans, mortgages, and any other debts by their due dates. If you have trouble remembering, you can set up automatic payments for your bills or set reminders on your phone.

2. Reduce Outstanding Debt

• Why it matters: Credit utilization (the percentage of your available credit that you’re using) makes up 30% of your credit score. If you’re using a large portion of your available credit, it can signal to lenders that you might be over-leveraged, and therefore, a higher risk.
• How to do it: Focus on paying down high-interest debt first (like credit cards). Ideally, you want to keep your credit utilization ratio below 30%—meaning you should aim to use less than 30% of your total available credit at any time.
  • For example, if you have a credit card with a $5,000 limit, try to keep your balance below $1,500. Paying off debt lowers your overall utilization ratio, which will boost your credit score.

3. Check for Errors

• Why it matters: Sometimes, your credit report may contain errors or outdated information that can drag down your score. These can include things like incorrect payment dates, wrong balances, accounts that don’t belong to you, or even accounts that were closed but still show as open.
• How to do it:
  • Obtain a free credit report from Canada’s two major credit bureaus—Equifax and TransUnion. You can request one for free once per year.
  • Review the report carefully for inaccuracies, such as late payments or high balances that you believe aren’t correct.
  • If you find errors, you can dispute them with the credit bureau, and they will investigate. If the mistake is on the part of the creditor, you should also contact them directly to resolve the issue.

4. Avoid New Debt

• Why it matters: When you apply for new credit, it results in a hard inquiry (or hard pull) on your credit report. These inquiries can temporarily lower your score by a few points. If you apply for multiple loans or credit cards in a short period, it can signal to lenders that you’re in financial distress or taking on more debt than you can handle, which can hurt your chances of mortgage approval.
• How to do it: If you’re planning to apply for a mortgage or a large loan soon, avoid applying for new credit. Don’t open new credit card accounts or take on new loans unless necessary.
  • If you’re in need of credit, wait until after you’ve secured your mortgage to make any new applications.

5. Increase Savings

If your credit score is on the lower end, consider saving for a larger down payment (ideally more than 20%). A higher down payment reduces the lender’s risk and may make it easier for you to qualify, even if your credit score isn’t ideal.

Why it matters: When you have a larger down payment for a home, it reduces the lender’s risk and can often compensate for a lower credit score, especially with a conventional mortgage (a mortgage that isn’t insured by the government). A larger down payment shows lenders that you’re financially stable and less likely to default.

How to do it:

• Start by creating a savings plan for your down payment. Set a realistic target amount based on the home you want to buy. A typical down payment in Canada is 20% of the home’s purchase price for conventional mortgages. However, you can put down as little as 5% for insurable mortgages, depending on your credit score and the type of mortgage.