Why You Need Good Credit When Buying Real Estate
By Danny Ablakan and Matthew Ablakan
To understand why you need good credit when buying real estate, you must first understand what good credit is. Different credit reporting agencies have their own definition of “good” credit, and so to keep things simple we will use Equifax – one of the leading credit reporting agencies – as our benchmark.
According to Equifax Canada, a consumer has “good” credit when their credit score is above 659. This is consistent with many lenders, as the five major banking institutions typically draw the line at 650 for what they consider to be “good”.
As a consumer looking to buy real estate, you’ll almost certainly be working with a lender to secure a mortgage, and here are three reasons why good credit can help:
Reason #1 – Having the option of putting less than 20% as a down payment
In Canada, if a buyer puts down less than 20% of a down payment on a piece of real estate, they must obtain what is called an Insured Mortgage. This will require you to pay an insurance premium that protects the lender in case you default on your mortgage – because you are putting less money down, you will be seen as riskier due to having less to lose than someone who has made a larger initial investment.
However, the Insured Mortgage option is only available with “A” lenders – such as the five major banking institutions – who will typically turn you down if your credit score is below 650. This means you will then have to go to a “B” lender, who will require you to put down 20%.
So, with good credit, you’ll be able to put down less than 20% – without it, you’ll need at least that much to move forward with securing a mortgage.
Reason #2 – Saving money when qualifying for a mortgage
If you like saving money, having a good credit score will help you save thousands of dollars when qualifying for a mortgage. Without good credit, and a minimum credit score of 650, you will have to resort to qualifying with a “B” lender – and that can come with expenses that “A” lenders do not charge.
Many consumers, including business owners, use “B” lenders for various reasons – most often for their flexibility in calculating the income of borrowers, and allowing them to take on more debt than your typical A lender. This flexibility, however, comes at a cost.
B lenders typically charge a 1% “lender fee” on the mortgage amount, which is payable on closing. For example, if you buy a townhome for $700,000 and obtain a mortgage for $560,000, you will need to pay a one-time fee of $5,600 – and this fee does not go towards your mortgage.
Reason #3 – Qualifying for better interest rates
Most importantly, the interest rates between “A” and “B” lenders also vary. For example, if an “A” lender is offering interest rates of 1.99%, a “B” lender will likely be offering rates starting at around 2.99% – if you’re lucky!
This means that, in the townhome purchase example above, you would pay approximately $288 more a month in interest because your credit score did not qualify you with an “A” lender. Buying a home is already financially draining, so it is always best to ensure you have good credit to qualify for good rates – and zero fees!
Good Credit is Key
As a consumer looking to purchase real estate, you need every advantage you can get! With good credit, buying real estate will always provide you with the option of putting less money down for a home, as well as the opportunity to save thousands of dollars in interest and fees.
Good credit is always worthwhile, but when it comes to real estate, the difference it can make to your financial future can be tremendous. If you’re interested in learning more about how to build good credit, check out this resource from the Financial Consumer Agency of Canada.
About the Authors
Matthew Ablakan, Broker of Record/Owner, B.A. Hons., B.Ed.
Matthew Ablakan is the Founder & Owner of Millennial’s Choice: a Real Estate, Mortgage, Insurance & Education Brand.
To better benefit his clients, Matthew has earned numerous degrees including a Bachelors in Education, a Honourary Degree in Law, a Real Estate Brokers License, a Mortgage Brokers License and a Life Insurance License.
Education & Financial Literacy are important facets to the success of Millennial’s Choice.
Danny Ablakan, Broker, B.A.
Danny Ablakan is a York University graduate with a background in Economics & Law. He is a Mortgage/Real Estate Broker with Millennial’s Choice. Danny uses his extensive mortgage background to create tailored real estate plans for clients and navigates them through the approval process. Danny specializes in providing multiple solutions for clients and uses a needs-based approach in helping clients narrow down their best options.
About Millennial’s Choice
Millennial’s Choice was created with the vision of helping all people enter the Real Estate Market. Since its inception in 2016, MC has helped many individuals with their Real Estate, Mortgage, Insurance and Investment needs, and continues to grow exponentially.