Even though prices in Ontario have been declining since the beginning of the second half of 2022, many buyers still apply for a mortgage. In order to make your mortgage application appealing to improve your current mortgage, and to possibly make significant savings with the best mortgage rate, a good credit score is essential.

What is a credit score? 

A credit score is a number that ranks your creditworthiness. This score is part of your credit report, and it can range between 300 and 900. The higher your score, the better your chance of being approved for a mortgage. Before applying for a mortgage, verify that you have a good credit score and meet the minimum requirements of your prospective mortgage lender. This minimum number was lowered from 680 to 600 in 2021. It is common in all Canadian provinces and territories. But in reality, a competitive credit score will exceed 660. Financial institutions interpret a good credit score as an indication of a reliable credit user who is unlikely to default on their payments.

f one member in a couple doesn’t meet the threshold, it is not necessarily a problem as long as the other borrower has a score above the minimum number.

3 criteria that affect your credit score

Lenders need to know that you’re creditworthy before they approve you for a mortgage. Here are some tips for improving your credit score before you apply for a mortgage.

Financial background 

Some financial points really need to be taken into consideration because they can strongly affect your credit score. 

• Credit history: Lenders may not find you creditworthy if you have never taken out any credit before. To prove your creditworthiness, it is important to have previously used credit (and paid it off on time!). Before applying for a mortgage make sure that you have a mix of car loans, personal loans or credit cards in your credit history.
• Inquiries: Submitting too many new loan applications sends a negative signal to lenders. It can indicate to them that you have a cash flow issue. Inquiries temporarily hurt your credit score, so be strategic about whom you apply to.
• Payment history and public records: This factor alone accounts for 35% of your credit score. It is essential to pay off bills on time. A single default or late payment could lower your score by as much as 150 points.

Financial behaviour

Other financial criteria can have a significant impact on your credit score too and need regular attention: 

• Credit utilization: If you have multiple credit cards, you should pay attention to the ratio between your credit card balances and your credit limit (mentioned on your credit report). These balances can run up faster than you might think and can negatively affect your credit score. A good way to limit their effects is to always stay under 30% of your credit limit.
• Accounts average age: The length of your lending history also has a role to play. The longer the period in which you can demonstrate good repayment behaviour and responsible credit use, the higher your credit score will grow. It isn’t wise to apply for new credit before applying for a mortgage. It lowers the average age of your accounts and can temporarily drop your score.

Personal background

Finally, your personal situation is important for lenders. Financial institutions will have a closer look at your current personal finances including:

• Your income
• Your employment history
• Your expenses and spending
• Your current debt

If your situation is stable and you are not burdened with debt, these four criteria will help you prove your ability to pay back your mortgage. 

You now have the keys to improving your credit score before you apply for your mortgage. Mortgage lenders weigh these criteria to understand your current debt situation and your future monthly living costs in your new property. A mortgage broker can assist you in understanding these criteria and improving your credit score.