Buying a home can be a long and tedious process with many hoops to jump through. One of the most important things when buying a home is applying for a home loan. This process can be nerve-wracking as interest rates fluctuate based on the current housing market and your personal financial portfolio, especially your credit history. In this article, we will provide some advice on credit scores and applying for a mortgage. Readers can expect to be experts on their credit scores at the end of this article.
Increase your chances of being approved with a great credit report
A credit report will tell you many things, but not your credit score. It can detail the amount you have taken out in loans before (e.g., your car loans, previous mortgages, student loans, etc.), the amount in your savings accounts (e.g., investments, emergency fund, etc.), your payment history, and more. Everything that has impacted your financial portfolio and credit score in the last seven years is held on your credit report.
This comprehensive report gives mortgage lenders all the information they need to determine whether you are a financially responsible individual. There are several important elements that lenders look at when they are determining whether to grant you a new credit loan and what interest rate you will receive.
Have a good credit score
Your credit score affects whether you are granted mortgage approval or not. Having a high score will be a telltale sign to lenders that you are a trustworthy borrower. A higher credit score will also grant you low-interest rates and, as a result, cheaper mortgage payments. An individual with a lower credit score may be shocked to find that their lenders have only offered them higher interest rates than those being advertised. Keep reading to learn how you can check and improve your score.
You should have a good diversity of credit products
Credit products mean advances and lines of credit like a mortgage, car loan, credit cards, etc. These credit products show that you have the ability to invest in various lines of credit and make your monthly payments.
Signing up for a new credit card is one of the easiest ways to expand your credit products if you do not plan on buying a car or taking out another loan. The only thing to remember is that payment for your credit cards needs to be done on time otherwise it could worsen your credit score.
Have a low debt-to-income ratio of 36% or less
A debt-to-income ratio is determined by your monthly income versus how much you pay each month for your outstanding debts. For example, if you make $4,000 each month but pay $1,200 in car and student loans, then you have a debt to income ratio of 30%. It is best to keep your ratio low to prove your ability to pay your mortgage payments.
Have a steady source of income
It is best to maintain a steady source of income throughout the process of buying a home to prove your trustworthiness and financial responsibility to your lender. It can also help make paying your down payment easier. Every potential home buyer should wait until they have bought their house to switch jobs.
Those who are self-employed may have more difficulties proving their steady income. We recommend that you speak to a mortgage professional at your bank if you are self-employed and want to buy a house.
The ins and outs of your credit score
A credit score is a three-digit number that comes from your credit report. It is a system created by credit bureaus to rate how risky it would be for a lender to give you money based on your previous purchases and past repayments. Each person receives points the more they manage their credit responsibly and lose points if they have difficulties paying off existing debt or have missed or made late payments. In short, your credit rating lets potential lenders know whether they are at greater risk for loaning you money.
Some factors that influence your credit score are:
How long you’ve had a line of credit
If you have missed payment one or more times
Whether you have made late payments
Your debt load or outstanding debt
Being close to, at or above your credit limit
If there is a record of bankruptcy
The number of recent credit accounts in your name
Your balance on your credit cards
Although a credit score may seem like a simple concept, it can be difficult for many people to understand their credit reports. What is considered a ‘good credit score’ differs from country to country. In Canada, credit scores range from 300 to 900 points. 660 to 725 is “Good,” 725 to 760 is “Very Good,” and 760 points and above is classified as “Excellent.”
The best credit scores for a mortgage loan
In 2021, the minimum credit score required by mortgage lenders to receive a mortgage loan is 640. However, this doesn’t mean that potential borrowers with bad credit will receive the best interest rates that are currently causing a boom in the housing market. People who have poor credit are more likely to receive a higher interest rate than those who have good credit. This is why it is important to take care of your financial health and boost your credit score. A will ultimately get you approved for a mortgage and lower interest rates.
Check your credit history online
It is a good idea to check your credit score before approaching a mortgage professional. All Canadians are entitled to one free credit report per year from Canada’s two credit reporting agencies, Equifax and TransUnion. These credit reports can be requested via mail, phone, or email. If you have already requested your one free report, your credit reporting agency may require you to pay a small fee for your next report.
In order to receive your credit score, you will have to pay a one-time fee or pay for a subscription service that provides weekly, monthly or yearly updates on your credit rating. This could be a worthy investment if you are looking to improve your credit score or are filling out a mortgage application.
Prepare to be tight on time while looking for a mortgage
When you are shopping around for a new mortgage, your lenders will perform a hard inquiry to check your credit. Each time a hard inquiry is done, it will usually impact your credit score. Thankfully, credit reporting agencies have considered that people may be shopping around for different loans and altered their rules.
According to Equifax, “multiple inquiries are generally counted as one inquiry for a given period of time. The period of time may vary depending on the credit scoring model used, but it’s typically from 14 to 45 days.” This allows you to keep your same credit score as various mortgage professionals pull your credit report. As a result, you can maintain your good credit.
Improve your credit score
If you have applied for a loan and have yet to be approved for a mortgage or were denied, it is extremely likely that you will need to take some time to improve your credit score. Lenders have many credit requirements that potential borrowers must fit in order to be granted a mortgage.
Improving your credit score can be difficult to do, but not impossible. Expand your credit products and in a short period of time so you can get back on track to buying your house.
Before you apply
Currently, Canada’s high housing prices are coupled with low-interest rates. This has caused many people to seek mortgage approval before even checking their credit score. A mortgage lender will want to see more than your down payment to ensure that you are a trustworthy borrower. Before you apply for a mortgage, try to:
Pay off your credit card debts
Diversify your credit products (e.g., credit card, auto loan, line of credit, etc.)
Maintain a steady income
Check your credit history and score
A mortgage application can be a tedious task. If you require any further assistance, we recommend that you seek the help of a mortgage professional at your bank.
Emma Scott is a Content Writer with a passion for accessibility, the environment, and history. She currently works for Merged Media (a proud partner of CREW & REP) in Guelph, Ontario.
Emma Scott is a Content Writer with a passion for accessibility, the environment, and history. She currently works for Merged Media (a proud partner of CREW & REP) in Guelph, Ontario.
