If you are shopping for a house, you are also shopping for a mortgage, unless you’re wealthy and have a few hundred thousand dollars sitting in the bank.
One of the first things that will come up when applying for a mortgage is your credit score. Your credit score is the measure that lenders use to assess your financial health and decide whether or not to approve your mortgage application.
The Big things that you need to know about your score are:
You’ll need a score of 600 or better to be approved for a mortgage
If you score 680 or better you have AAA status (and that’s good)
Anything higher than 680 is really good and will get you the best rates.
There are 2 companies in Canada that are credit reporting agencies
It’s a good idea to know your credit score. If you want, there are free apps available that you can use to get an instant result. Try this one out, it won’t affect your credit rating, and does a whole lot more that just a credit score.
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Things That Affect Credit Score
Let’s go a little more in depth now.
Each of the credit reporting agencies calculates your credit score a little bit differently, but both use the following factors:
Past Payment History - Have you had any late or missed payments, overdue accounts, bankruptcy, etc. These will lower your score.
The Amount of Credit Used - How much of your total credit are you using. Ex - if your credit card has a $2000 limit, and you have $1500 charged on it, you are using 75%.
Credit History - Are your credit accounts brand new. Older ones that have been maintained are valued higher for credit scores.
New Requests for Credit - How often are you applying for credit? Checking your own score will not hurt you, but applying and getting refused will lower your score.
Types of Credit - Revolving or Installment - It’s good to have a mix of both. An example would be a credit card, a car or personal loan, and a line of credit.
Credit Scores and Your Mortgage Application
Your credit score will allow you to get approved. But, the higher your score, the better the rate will be that you get approved for.
So knowing your score, and working to make it higher, will definitely benefit your application.
Prime lenders like the big banks and large mortgage institutions will positively give you a mortgage if your score is about 700. They will also give strong consideration to score between 600-700.
If your score is 599 or lower, you are going to have to go to other lenders. Trust companies, and other institutions that work with people who have “bruised credit”. It doesn’t mean you won’t get approved, but you won’t qualify for the best rates. This might be a good opportunity to take out a shorter term, with a higher interest rate, then switch over after a year or two when your score is higher.
Do you have bad credit?
Find a broker trained to help you.
You Can Improve Your Credit Score
It’s not the end of the world if your score is not 600 or above right now. There are ways that you can improve your score.
Keep using credit, but make sure you pay it off every month
Always make your payments on time, even if it’s just the minimum. If you are really desperate one month, make sure to call your creditor and let them know. They will work with you if you are honest and open with them
Keep your credit use to 35% or less. Example - if your card has a $1000 balance, don’t put more than $350 balance on in for more than a month or so.
If you have an old card - don’t cancel it. Just put it away and don’t use it. Long credit histories will help your credit score.
Don’t apply for credit too often - the more times you apply for new credit, the worse it looks for lenders.