A Guide to Credit Scores for A Mortgage Approval

Navigating the world of mortgages can often feel like decoding a secret language, especially when it comes to understanding credit scores. If you’ve been wondering about the intricacies of credit scores and how they impact your mortgage approval, you’re in the right place. Let’s dive deep into the world of credit scores and how they play a crucial role in your journey to securing a mortgage.

What Is the Minimum Credit Score for a Mortgage in Canada?

The minimum credit score depends on the lender type:

• 600 is typically the minimum for traditional A lenders
• 500–600 may qualify with alternative lenders
• Below 500 usually requires private lending

The higher your score, the more options and better rates you’ll have.

The Role of Credit Scores in Mortgage Approval

The majority of lenders use a FICO credit score from Equifax to assess your mortgage eligibility. However, it’s essential to know that there are multiple credit scores on a credit bureau. The score you see when you check personally (ERS 2.0 score) may differ from the FICO score obtained during a professional (hard) credit check, as they are calculated using different algorithms. Remember, mortgage lenders primarily use Equifax, so ensure you’re looking at the right score.

Where to Check Your Credit Score

If you’re unsure about your credit score, consider purchasing a report from Equifax or obtaining a free copy from sites like Borrowell.com. These personal scores are usually accurate within 50 points of your official FICO score.

Mortgage lenders in Canada primarily use Equifax FICO scores. TransUnion scores (like Credit Karma) may differ significantly because they use a different scoring model. For mortgage purposes, Equifax is generally considered the gold standard. If you want the most accurate reflection of what a lender will see, purchase your report directly from Equifax.

Understanding Credit Score Requirements by Lender Type

A Lenders (Traditional Banks & Mortgage Lenders)

• Minimum score: 600
• Ideal score: 680+
• Lowest interest rates available
• Down payment as low as 5%
• Best overall mortgage terms

B Lenders (Alternative Lenders)

• Typically accept scores between 500–600
• Minimum 20% down payment required
• Interest rates are usually about 1% higher than A lenders
• Often charge a lender fee (typically 1–2% of the mortgage amount)
• More flexible with income types (self-employed, rental income, etc.)

Private Lenders

• Usually used when credit is below 500
• Down payments often 20–35%
• Higher interest rates
• Shorter term solutions

A vs B Lenders – What’s the Real Difference?

An A lender is your traditional bank or mortgage-only lender offering the lowest rates and most favorable terms.

A B lender is an alternative lender used when a file doesn’t fit traditional guidelines, whether due to credit, income type, or unique circumstances.

It’s important to understand that it’s not always just about credit, and we regularly see clients with 800+ credit scores using B lenders because of income complexity, Airbnb income, self-employment, or new-to-Canada files.

If you qualify for an A lender, that is almost always the preferred option.

How Much Higher Are B Lender Rates?

Interest rates with B lenders are typically around 1% higher than A lenders.

However, this can vary based on:

• Term length (1-year, 2-year, 3-year vs 5-year)
• Credit score strength
• Overall file quality

One important thing to note:

B lenders also charge a lender fee, typically 1–2% of the mortgage amount.

For example:

On a $400,000 mortgage, a 1% lender fee equals $4,000.

That’s why we always try A lenders first.

Improving Your Credit Score

• Focus on Utilization: Utilization, or the percentage of your credit line being used, is crucial. Keeping your credit utilization below 50% can positively affect your score. Pay down over-limit credit lines first for maximum effectiveness.  
• Balance Across Credit Lines: Aim for even utilization across all credit lines, rather than maxing out one while leaving another barely used.
• Patience Is Key: It can take up to 45 days for these changes to reflect on your credit report, depending on your credit reporting cycle.
• Learn More: If you want to learn the quickest and most effective ways to increase your credit score, then click here to read my post on how to improve your credit score for a mortgage. 

The Importance of Credit History

Even with a credit score above 650, you could get declined for a mortgage due to insufficient credit history. Lenders need to see that you’ve managed credit responsibly over time. Follow the “2-2-2 Rule”: at least 2 credit lines, 2 years of history, with a minimum limit of $2,000 on each.

Types of Credit

• Revolving Credit: Includes credit cards and lines of credit; essential for showing active credit management.
• Installment Credit: Fixed payments, like car or student loans, show ability to manage long-term debts.
• Open Credit: Typically paid in full each month, like phone bills. Ensure these are always paid on time.
• Mortgage Credit: Not necessary for a great score, but crucial never to miss a payment.

Non-Reporting Items

Some bills like utilities might not appear on your credit report, but defaulting can lead to collections that will.

Ready to See Where You Stand?

Understanding your credit score and its impact on mortgage approval is a crucial step in your home buying journey. Whether you’re already in a good place or need to work on improving your score, remember, every financial situation is unique. Seeking advice from a mortgage professional can provide you with a clear roadmap tailored to your circumstances.

Ready to explore your options? Let’s connect and find the right mortgage solution for you.

FAQs About Credit Scores