A critical part of preparing to buy your first home is qualifying for a mortgage loan.
There are many factors that lenders consider when you’re applying for a mortgage, including but not limited to, your downpayment, employment and credit. And when I say credit, I mean your full credit history and credit score.
Your credit will play a very important role in the mortgage qualification process, and many people don’t understand this until it’s too late.
I want to give you the information you will need to:
- Find out what your credit score and history are right now.
- Make sure that you have the minimum score needed to buy a home in 2021.
- Improve your score beyond the minimum to get preferred rates that could save you thousands of dollars in interest.
What is a credit score anyway?
A credit score is a number or rating that evaluates your creditworthiness based on your credit history.
Lenders use credit scores to decide whether to approve you for loans or credit products such as a line of credit or a credit card.
Lenders also use your credit score to determine the interest rate you will be charged on a loan or credit product.
Your credit score can also be used to determine your suitability for renting a property, being approved for a job, or how much you are charged for insurance.
What counts as a good score?
Your credit score is a number between 300 and 900.
Ideally, you want to have a score between 670 and 900 to be approved for loans and get the best rates.
The higher your score, the lower the risk for the lender and the more likely they’ll want to give you money.
Here is how the credit range is generally broken down:
- 300 - 579: Poor
- 580 - 669: Fair
- 670 - 739: Good
- 740 - 799: Very good
- 800 - 850: Excellent
A low score presents a higher risk and the lender will worry about getting their money back. With a low score, you’ll either be denied the loan or be charged a higher interest rate.
A higher interest rate will cost you thousands of dollars more over the life of the loan than someone with a better credit score.
The minimum score that you should be aiming for
The minimum credit score needed to qualify for a loan at a reasonable rate depends on the lender. But you should aim to have a minimum score of 670.
As I said earlier, your credit score is a significant part of the mortgage approval process. The higher your credit score is, the better your chances are of getting approved and the better interest rate you will receive.
It’s all in your credit report
Your credit score can be found on your credit report.
Credit reporting companies such as Equifax or TransUnion Canada compile and report on all your credit activities.
This report will include information such as your full name, address, date of birth, employment and a summary of all your past and current financial obligations.
This summary will have details about:
- Your credit card accounts and payment history.
- Banking information (including non-sufficient funds cheque), and
- Bill payment information including any history of collections or if you have filed bankruptcy.
Additionally, your report will also note the number of times your credit report has been requested. Too many requests for your credit score or report may negatively affect your credit.
How does fair or poor credit affect you?
Your credit is a representation of who you are and how you manage all your finances both in the past and the present. So a fair or poor credit score can affect many aspects of your life.
Fair or poor credit can affect you in terms of housing, employment and access to loans and credit. It can:
- Prevent you from owning a home or qualifying for a rental.
- Make mortgage payments unaffordable due to high-interest rates.
- Deter employers from hiring you.
- Disqualify you from getting essential loans such as a car loan or a new credit card.
Don’t settle. Improve your credit score
Having an excellent or very good credit score is essential in qualifying for a mortgage and receiving preferable interest rates.
I’ve outlined some steps that you can follow to learn about your credit score and improve and maintain your credit score if it is too low.
✔︎ Get your full credit report and your credit score
Equifax Canada or TransUnion Canada are the only 2 places to get your full credit report.
Below are links for each option.
Please note there is a fee for your report. Equifax offers a free report but it does not include all the details that you need.
For both companies, a monthly membership may be required, but you can cancel anytime.
Once you have your report, review the details to confirm that all the information is accurate. If there are any inaccuracies, dispute them right away.
You should check your credit report at a minimum once a year or twice a year.
✔︎ Make ALL your payments on time with no exceptions
Part of your credit score is based on your payment patterns, lenders use this to predict your future behaviour.
If there is a legitimate reason why you can not make a payment, call the provider and find out if any arrangements can be made before the due date.
This can save you from being sent to collections which will affect your score.
✔︎ Do not max out your credit limit
A good rule is not to use more than 35% of your available credit. This demonstrates your ability to manage credit.
✔︎ Limit the number of credit accounts you have
You don’t want to lose track of which cards you have and the balance owing on each card.
Limit the number of cards to no more than 3.
Although the number of accounts you have will not really affect your score. The amount of debt on each card will.
✔︎ Don't apply for credit too often
Too many lenders asking about your credit in a short period of time can lower your credit score.
✔︎ Pay off your debts as quickly as possible
Life happens and you may have to use more credit than what would be ideal. If you have to use credit in an emergency scenario, focus on paying down your debt as soon as possible.
Your credit score and history play a very important role in the mortgage qualification process and the quality of your credit can help or hinder your ability to reach your goal of buying a home.
If you have more questions about your credit score or other aspects of preparing to buy a home, please leave a comment below or contact me directly.