Courtesy of:
Matthew Daniel Tamburello
Team Leader & Broker/Owner
Trinity Real Estate Consultants
647-697-6743
matthew@searchhomesingta.com

 

HomeBuyers & Investors: Why your credit score is so important when buying a Home?

 

When you’re making the plunge to buy a house, there are many important steps involved. One of the most important steps is applying for a mortgage. 

 

When lenders review your mortgage application, they look at factors such as your employment status, your income, and the size of your down payment. Did you know that lenders will also look at your credit? You may not know it, but your credit can impact your chances of qualifying for a mortgage. Good credit can also help you qualify for lower interest rates, which can help you save hundreds on your regular mortgage payments over time. 

 

Let’s take a look at how important your credit score is when getting a mortgage.

 

 

Put simply, your credit score is a number between 300 and 900 that summarizes how financially responsible you are. The higher your score, the more attractive you appear to banks, mortgage brokers, and other lenders.

 

Credit scores in Canada typically fall into five ranges, from poor to excellent:

 

1) Poor: 300-574

2) Below Average: 575-659

3) Fair: 660-712

4) Good: 713-740

5) Excellent: 741-900

 

When shopping around for a mortgage, you should aim to have a fair credit score of 680 or above. The credit score needed for mortgages is not an exact science; some lenders work with borrowers that have credit scores between 600 and 680, but these lenders may charge higher interest rates. To keep it simple, you should make sure your credit score is fair, good, or excellent before applying for a mortgage. You can use a service like Borrowell to check your credit score for free.

 

 

Your credit score is calculated based on five main factors related to information listed on your credit report. This information is collected by Canada’s two main credit bureaus: Equifax and TransUnion. Each of the five main factors listed below makes up a certain percentage of your overall score. Here’s a breakdown of each factor:

 

 

This refers to your history of making payments towards your credit cards, loans, and other accounts on time. Good payment history can help you maintain a strong credit score. Missed payments will appear on your credit report and can hurt your credit score.

 

 

This refers to how much credit you’re using versus the total credit limit available to you on your credit cards and lines of credit. A low credit utilization rate can help you maintain a good credit score. A high credit utilization rate can hurt your credit score, and it may signal to lenders that you’re stretched thin financially.

 

 

This refers to how long you’ve had credit established, including the age of your oldest account and the average age of all your accounts. A long credit history can help you develop a strong credit score over time. Lenders prefer working with clients that have an established credit history with good payment behaviour.

 

 

This refers to the different types of credit accounts you have open, including credit cards, cell phone plans, and car loans. If you have at least two different credit accounts open that you make regular payments towards, you have a solid credit mix that can help you maintain good credit.

 

 

This refers to the formal credit pulls that lenders make when you apply for financial products. Each time you apply, a lender will pull your credit file, and this will be recorded on your credit report. Having too many credit checks listed on your report can temporarily hurt your credit score.

 

Your credit score is calculated based on data and information listed on your credit report. Your credit report is like a detailed financial report card that shows when you’ve been granted credit in the past. Your report will show what credit accounts you have open (like credit cards and loans), what balances you have on them, and your payment history for each account. 

 

If your credit report is like a report card, your credit score is like your final grade. This score summarizes all the data from your credit report into an easy-to-digest number that showcases whether you’re a responsible borrower. 

 

 

Your credit score and credit report carry a lot of weight with banks, mortgage brokers, and other lenders.

 

A good credit score can help you get approved for a mortgage with favourable terms and a low interest rate. This can help you save hundreds of dollars in interest payments over time. 

 

On the other hand, a bad credit score can pigeonhole you into higher mortgage rates from lenders, causing your dream home to cost more in the long-run. Some lenders that work with lower credit borrowers may also charge additional fees for their services. A low credit score can sometimes even prevent you from qualifying for a mortgage entirely, which may force you to put your home-shopping plans on pause.

 

When your credit score is low, it’s low for a reason. A mortgage represents a lot of borrowed money. Before lenders will approve you for a mortgage, they want to know you’re a responsible borrower. If your credit score and credit report indicate a history of late debt payments late, you pose a higher risk to lenders. As a result, you may only qualify for high mortgage rates with bad credit.

 

 

Now that you know how credit scores work, how they’re calculated, and why they’re important when buying a house, here are some general tips on how to improve your credit score before applying for a mortgage.

 

 

Your payment history is the largest factor that impacts your credit score, so this should be the first area you should focus on. Paying your bills on time consistently is essential to improving your credit and maintaining a good credit score.

 

You should set bill payment reminders on your phone or digital calendar so that you never miss a bill. You could also use bill tracking tools to alert you about upcoming bills or automate regular payments through your bank account or credit card.

 

 

Late payments can have a large negative impact on your credit. If you forget to pay a credit card bill, your phone bill, or other bills, your lender or service provider will report your late payment to the credit bureaus, and this will be recorded on your credit report.

 

Late payments can stay on your credit report for up to six years. The longer you leave a late bill unpaid, the more damage it can do to your credit. If you’re looking to get a mortgage now, make sure you don’t have any late payments plaguing your credit score!

 

Late payments can hurt your credit score, even if it’s only a small amount. This viral TikTok shows how even a small missed payment can decrease your credit score by 100 points and hurt your chances of qualifying for a mortgage.