What credit score do I need for a house?

family playing house

“Home Sweet Home” reads the framed needlepoint hanging over Susan’s bed. She looks at it every night and dreams of a time when she will own her own home. You see, Susan has lived in a rented apartment or house all her adult life. While she easily makes any new place feel like home, she wants a house she can truly call her own. To be able to paint her walls without asking permission. To not feel like she’s throwing her money away when she makes another inflated rent payment. Plus, it would be a milestone for her, just like it was for her parents. Some things don’t really change.

Do you dream of owning your own home like Susan, too? Or perhaps you already own your home, but want to buy a bigger, better one. If you said yes, you’re just like over half of the Canadian population who are choosing to buy rather than rent. Buying your own home comes with several advantages. Let’s take a look at why it may be better to buy than to rent.

Building Equity

When you buy your own home, the house becomes one of your assets. Buying your home is an investment that you make. If you were to rent your house or apartment out to tenants, it could also help you generate income. So, buying a house is always a great way to increase your equity. On the other hand, when you rent, it is an ongoing expense. The money that you spend on your rent could instead be put towards mortgage payments. By buying a home, you can build equity and grow your wealth.

Stability

Buying a house or apartment provides you with stability. You always have a place to go back to and a roof over your head. In fact, it fulfils one of the three basic needs – shelter. When you rent, there is always a chance that your landlord can request you to leave and demand possession of their property. Or they may increase the rent every year. If it is impossible to make the rent payments, you may be forced to leave. Owning a house not only provides a physical shelter, but it also creates a psychological sense of security.

Flexibility

You may think that renting offers more flexibility than buying. It does. However, it only offers one kind of flexibility – where you live. When you rent, you can pick up and leave any time you like (after providing your landlord with due notice, of course). Renting only offers geographical flexibility. But you don’t have much flexibility when it actually comes to your house or apartment. You must maintain it more or less the way it was given to you. Or spend money restoring the house or apartment to its original condition when you leave. Some neighbourhoods and apartment complexes may also have separate policies for homeowners and tenants. On the other hand, when you own your own house you can do as you please. You can tear a house down and build it from the ground up again. Or you can renovate the interiors to suit your tastes. You can add wings, break down walls, change fixtures. In short, you can do what you like with a house or apartment you own.

Privacy

Another great reason to buy a house is because it affords you so much privacy. If you can do what you like with a house you own – you can also do what you like in a house you own. (As long as it’s legal, of course!) When you own your house, you are free to do as you like within its walls. Of course, there may be some neighbourhood regulations you may have to follow, but those are all generally reasonable and part of living in any civilized society. When you rent, you have to follow the rules set by your landlord. They may also be the prying type, keeping a watch on your every move. And if you want to continue to rent from them, you simply must put up with their conditions.

As you can see, it’s often much better to buy than to rent. Of course, whether you buy or rent depends wholly on your personal situation and finances too. Let’s look at some of the ways you can come to own a home or apartment:

By saving up

Ever heard of a nest egg? It’s an amount of money you save up to use in the future. Many people start saving a portion of their salary for years to be able to buy their own house. Depending on where they want to buy – since real estate rates differ based on area – you may need to save just a little every year, or a lot. Sometimes, you might not be able to afford to buy your own house even if you use up all your savings. But that shouldn’t be a cause for concern. You can always take out a mortgage – a type of home loan – for your dream home. More on that later!

By inheriting

Buying a home can be a costly affair, especially with surging real estate rates. But the easiest way to own your own house or apartment is through inheritance. That means, if someone leaves their house or apartment to you in their will, you become its legal owner after their passing. Of course, you may still have to pay some inheritance tax based on the value of the property and your relationship with the deceased. However, it may certainly be more affordable than actually buying your own home or apartment.

By getting a mortgage

If you’ve decided to buy your own house, but need a little financial help, the best thing to do is opt for a mortgage from your bank or credit union. As we’ve said above, a mortgage is a kind of home loan or housing loan. Once you have selected the property you want to buy, you can apply for a mortgage. The bank or credit union will look at your financials – including your credit score – and lend you the funds to buy the house or apartment. The loan would be a portion of the cost of your new home. You’ll have to pay for a portion as well.

Usually, the house itself is taken as a security that you will pay back the loan. That means, if you are not able to make your mortgage payments, the bank or credit union can take possession of your property. You may provide other property or assets as security for your mortgage too.

Once you have paid off your mortgage, you gain complete ownership of your house. It’s a great option for when you want to own a house but can’t afford to buy it outright.

So far, we’ve seen that it’s better to buy than to rent. Plus, unless you have a wealthy benefactor, getting a mortgage is a fantastic option to buy your house. However, not all mortgages are the same. There are different types of mortgages, with varying mortgage rates, and payment schedules. You also must be eligible to get a mortgage. One of the key factors of eligibility is your credit score.

What is a credit score?

Your credit score is a rating based on your credit history. It can be anywhere between 300-900, with 650 being a decent score that would allow you to be eligible for most financial products and services (like loans and mortgages). If you’ve been responsible with your finances – such as by paying your credit card bills on time, paying back loans promptly, always maintaining the minimum balance in your account – you will have a good credit score. The higher your credit score, the higher the chances of you getting a loan or mortgage. Besides, having a good credit score also means you can get better interest rates when you opt for a loan or mortgage. Usually, these scores are decided by a credit reporting agency, such as Equifax. Since Equifax is one of the most trusted and commonly used credit reporting agencies, your credit score may be referred to as your Equifax credit score.

Now that you know what a credit score is, let’s look at the different types of residential mortgages and credit scores you need to be eligible for each.

Insured Mortgage

If you insure your mortgage, this means if you are unable to make your mortgage payments, a mortgage insurance company will make the payments for you. Innovation uses a reputable insurance company called CUMIS. You can apply for a variety of insurance types for your mortgage: disability, life, loss of employment, or critical illness. So for example, if you lost your job during COVID-19 and had loss of employment insurance on your mortgage, CUMIS would make your mortgage payments until you found a job again (up to maximum time noted in your policy). You wouldn’t have to worry about losing your home during such a difficult time.

Uninsured Mortgage

If you choose not to insure your mortgage, this means if you are unable to make the mortgage payments, the lending institution can take possession of your property, or any asset you provide as security. If you can afford to, we highly recommend insuring your mortgage.

Types of Uninsured Mortgages

There are different types of uninsured mortgages. These include:

Prime Mortgage:

A prime mortgage is a secured real estate loan that is uninsured. To be eligible for a prime mortgage you need an Equifax credit score of at least 621. If you do not have a credit score, or more accurately, your credit score is 0, you can still be eligible for a prime mortgage, as long as you meet the other requirements. A credit score of zero is not necessarily seen as a bad thing. It could simply mean you do not have a revolving line of credit or have not used any credit-based products and services.

Fresh Start Mortgage:

If you do not qualify for a prime mortgage, you can always apply for an Innovation Fresh Start Mortgage. The interest rates for a Fresh Start Mortgage may be higher than a prime mortgage, but the credit score requirements are lower. To be eligible for a Fresh Start Mortgage you need to have an Equifax credit score of at least 600.

Non-Conforming Mortgages

If your Equifax credit score is less than 600, you can look into a non-conforming mortgage. This is a type of mortgage that does not conform to government-sponsored enterprises (GSE) guidelines. However, it is the perfect option for you if you want to buy a house or apartment but have a low credit score.

So, now that you know about the different kinds of mortgages and the credit scores you need to be eligible for them, you are in a better position to make a decision about getting a mortgage. Bear in mind that your credit score is only one factor. To choose the most suitable mortgage for you, always take the help of a financial advisor. Talk to one of our dedicated Innovation representatives and find the perfect mortgage for you today. And don’t forget to hang your own ‘Home Sweet Home’ sign when you own your own home!