There are many things to consider when applying for a mortgage. One of the things that will likely be weighing on your mind is your credit score. Your credit score is a number that determines your overall financial health. Lenders will use this number to determine your ability to take on loans.
Applying for a mortgage is much like applying for many other types of loans. Lenders and brokers alike will be interested in your ability to pay the loan back.
What is a credit score?
Your credit score is determined by a variety of factors. This includes your credit history and current credit habits, as well as the different types of credit you have.
The single credit score number ranges from 300 (very poor) to 900 (excellent). The magic number for most mortgage lenders and brokers is 650, which indicates good financial habits, therefore, allowing you to secure a mortgage.
How do I know what my credit score is?
Something that’s often overlooked is just how often credit is pulled. From rental applications to even employment applications, your credit affects much more than your ability to acquire more credit.
When your credit score is checked, it will sometimes count as a hard hit. In other words, the check itself can affect your credit score. It’s important to keep track of how often your credit is checked to avoid taking hard hits.
Hard hits occur when a business or individual pulls your credit. This can be in the situations above where your credit is pulled by a landlord or employer, but most often happens when you apply for new credit. Every time a potential lender pulls your credit, it counts as a hard hit.
You have two options to check your credit for free without impacting your credit score in Canada: Equifax and Trans Union Canada. Equifax offers free reports via mail, fax or telephone, and Trans Union Canada offers the ability to do so online.
Keep a record of every payment you make, and your debt amounts, to help ensure you have an idea of what your credit score looks like between credit checks.
What will my mortgage broker look for?
The magic number a mortgage broker will look for when getting pre-approved is usually 650. However, your mortgage broker will look at more than just that number.
What they’ll be most interested in is your ability to handle mortgage payments throughout the amortization period. They will look at your payment history, current debts, expenses, and income to figure this out. During the pre-approval and application process, they will use this information to determine what range of mortgage you can potentially be approved for.
How long will it take to rebuild my credit score?
Bad credit happens. Defaults and other poor credit activity remain on your credit report for seven years. But, you can start rebuilding your credit during this time. It can take up to six months to start rebuilding your credit. Don’t delay. Start building good credit habits now and you’ll be closer to that elusive 650!
What if my credit score is below 650?
If your broker sees that you have a credit score below 650, or even below 600, all hope is not lost! There are options you can pursue while working toward a healthier credit profile.
You can go with subprime lenders. Subprime mortgages tend to have steeper rates with seven per cent or more. Your mortgage broker can navigate these murky waters to find the best option from these subprime lenders.
It’s typically wise to have a down payment of at least 20 per cent. However, lenders will allow a down payment of as little as five per cent. When your credit score is poor, this goes from a wise move that enables you to receive a better mortgage rate to a necessity for many lenders.
If you’re able to cobble together a large down payment for your home, it not only ensures you need a smaller mortgage, but it proves to lenders that you’re capable of handling a mortgage.
How do I achieve a good credit score?
When building your credit, you want to consider your income and lifestyle. It’s important to remember that credit is measured proportionally. If you take out a credit card with a $1,000 limit and use $500 at a time, you’ll have a credit usage of 50 per cent , where a $500 usage on a card with a $5,000 limit would put you at a usage of 10 per cent. This would make your payment and spending habits around the credit card stay the same while you build your credit score!
Diversify your credit
Another way to build credit is to diversify your credit beyond just one credit card. A revolving line of credit and other types of loans can be useful here as long as you don’t apply for them all at once.
The reason you don’t want to go searching for many different sources of credit at once is because it can look like “shopping for credit” and makes lenders wary. This is one of the reasons applying for credit counts as a “hard pull,” negatively impacting your credit score.
Make your payments
Then there is, of course, the time-honoured advice of making your payments on time, whatever they may be. Every missed payment negatively impacts your credit score. Alternatively, every on time payment helps you build the credit you need to get that mortgage!
Another way to build or rebuild your credit is to make more than your minimum payments each month. This not only keeps interest from piling up, but it also keeps your balance low, reflecting positively on your credit score!
Now that you know how to improve and build credit, you can start working toward the credit you need to get a mortgage! If you’re unsure how to implement these tips in your life, or you are starting from no or poor credit and would like to discuss it with a certified mortgage professional, give me a call at (705) 333-4338 or get in touch with me here!