A credit score is a three-digit score that reflects your ability to repay debt. You acquire a credit score when you first start taking on debt, usually through a credit card. Scores can range from 300 to 900, but your starting score will likely fall in the middle of the spectrum.
Your credit score is mainly based on two types of credit: revolving credit and installment credit. Revolving credit operates on a periodic basis. You can take out small amounts of debt each month, so long as you pay it off. Most Canadians take on revolving debt through a credit card.
Installment credit is usually a lump sum loan. Once you pay off this debt, you cannot use it again. Most Canadians take on installment debt through car payment loans or mortgages.
Having a low credit score is bad, it means you have consistently taken on debt and failed to repay it. Most lenders will not provide you with a loan if your score falls below a certain threshold. Having a “no score” is not the same as a low score. While you have not yet proven your ability to repay debt, you also have not proven that you are an irresponsible borrower.
In order to apply for a mortgage, lenders will typically ask for proof of your financial means and history. This can include your credit score and reports, proof of employment, tax filings, income statements, and more. Through these documents, your lender will try to determine the level of risk you present to them as a borrower, and adjust your mortgage rates and terms accordingly. The higher your income and credit score, the better your terms and rates will be.
If you have managed to completely avoid taking on any loans or credit cards thus far, you may find that your credit score does not exist. Luckily, there are still a few ways you can buy a house without one:
Your credit score helps qualify you for a mortgage by proving your creditworthiness. You may not need to qualify for a loan at all, however, If you have the means to pay for your home in cash. Paying for a property upfront is an unlikely scenario for many, but it is the most surefire way to purchase a home without a credit score.
When you purchase a home, you must pay for a portion of the property’s value upfront. This is called the down payment. The remaining value of the home is paid by your lender through a mortgage loan. The larger your down payment is, the smaller your mortgage loan will be. As such, most lenders will favour borrowers with high down payments. If you have no credit score, offering up a large down payment is a great way to improve your odds of approval.
Despite all your documentation and planning, your lender may still be wary of approving you without a credit score. In this case, you may need to bring a co-signer into your lease. If you have a significant other or family member who is willing to sign your mortgage in their name, you will significantly increase your odds of approval. It is important to understand, however, that co-signing a mortgage comes with immense stakes. If you are unable to make your monthly payments, your co-signer will be held liable.
If you do not qualify for a mortgage loan at a bank, consider looking into private lenders. While AAA lenders maintain very strict qualification standards, alternative lenders are often more flexible. Some loans do not require a credit score at all. Despite having looser approval guidelines, private lenders will often charge higher rates to account for the added risk you present.
Of course, the best way to improve your odds of approval is to begin building a credit score. The trick to building credit is to borrow small amounts and pay them back consistently. You may want to consider opening up a credit card or taking out small installment loans. By proving you can make your credit card payments on time, you are proving to your lender that you will be able to repay your mortgage loan.
Unfortunately, building a credit score is easier said than done. You cannot establish your financial credibility overnight. Realistically, you want to begin building your score at least a year before you apply for a mortgage. Even if you open a new credit account, it will take at least 12 months for the effect of your payments to affect your score. Furthermore, applications for new lines of credit will always hurt your score.
Regardless of where you are in your credit journey, Clover Mortgage can help. Our expert team of brokers can provide you with a private consultation to determine the best choice for you. Based on your unique financial situation, we will connect you to the perfect mortgage through our network of 50+ lenders.
Contact Clover Mortgage to schedule your free consultation today!