How important is your credit rating when applying for a mortgage?
I recently asked “What mortgage questions do you have?” on my facebook page (https://www.facebook.com/OttawaMortgageAdvisor?fref=ts) and someone posted a great question – “How important is your credit rating when applying for a mortgage?” …. I LOVE IT! It’s such a great topic to discuss because of how much credit can impact your buying strategy and how little most people know about their own credit.
The good news is, no matter your situation, I can find a solution that meets your needs and home buying and home owning goals. As a mortgage advisor, I work with some of the best lenders in Canada who look at the big picture and want to provide financing opportunities – short term or long term.
Your credit score determines what sort of risk you represent to a lender. It can impact your interest rate and the amount of down payment you need. As your dedicated mortgage advisor, I review your credit report with you; answer any questions you might have, make sure the information is accurate and if necessary show you ways to improve your credit.
What’s very important to know, a credit report (which is also called a credit “bureau”), is a detailed report of your current credit profile made up of your credit history. Credit cards, loans (personal or car) or lines of credit (secured or unsecured) are called trade lines. The ideal credit report should have two active trade lines with a minimum of two years of up to date activity. Any time you have been extended credit for any reason, past or present, it will show up on this report whether active or closed and provides a rating for each trade line. It will also show if you’ve had any past collections, bankruptcies, or consumer proposal and if they are paid or outstanding.
Credit scores (also known as a beacon) range from 400-900; 680 – 900 is considered VERY good; 620-680 is necessary to be approved with a schedule A-lender. 600-620 is a bit of a grey zone. Some lenders/insurers won’t approve anything with less than a 620 beacon score but some have made exceptions; some are case by case and the rest of the application has to be VERY strong. Anything less than 599 would require the assistance of an equity lender until the credit is improved.
The reason credit is so important for a mortgage application is because the lenders use the report to determine your level risk you represent for the loan. The amount of risk exemplify determines the amount of down-payment you require and/or the interest rate you will pay.
If you have a good credit history, you are more likely to be able to buy a home with the minimum 5% down payment (plus closing costs). In fact, some of my clients have had such good credit they even qualified for the no-down payment/cash back mortgage. If your credit score is more than 680 (even with some debt) you might qualify for a cash back mortgage and use the cash back for your down payment (OAC, certain conditions apply). This is not a mortgage you can ask for at your local bank because it’s only offered almost exclusively through the broker channel; another good reason to work with me – more options and tailored service.
Should you find yourself with a lot of debt; unmanageable and late or missed payments, you can still qualify for a mortgage with our equity lenders. Typically, they require a higher down payment because they don’t work with mortgage insurers (CMHC, Genworth or Canada Guarantee). They also require charge a higher interest rate to assume the risk. The good news about this is that it means you can still get a mortgage and as your dedicated mortgage and debt advisor, I continue to work with you throughout the term of your mortgage to improve and re-establish your credit in order to get you approved with the A-lenders in about 1, 2 or 3 years time.
There are many reasons why someone’s credit has been poorly affected; it’s rarely planned and never fun to go through. I’ve seen reasons from illness, divorce to loss of jobs. Whatever the reason, it can feel like an eternity to repair so you should work hard at the start to build and maintain good credit.
If your credit was bruised from a past bankruptcy or consumer proposal; follow the rule of 2. You must be discharged for at least two years, have two new trade lines (established after discharge) with a minimum for two years activity and they must be in EXCELLENT condition.
What’s also very important to understand is debt is not a bad thing. As long as your debt load is minimal and manageable, you can still go out and buy a house with the minimum 5% (or even the no-down/cash back mortgage). What can get you in trouble is over extending, assuming new loans, inability to pay the minimum payments, never paying down the balance or just playing the transfer game where you are constantly transferring balances from one trade line to another. This will certainly have a negative effect on your credit rating
A few tricks to improve or establish good credit:
- Have at least one trade line from a major banking institution.
- Don’t have too many credit cards or loans.
- Try not to carry a balance for more than 25% of your maximum available limit.
- Pay off at least the minimum if not the full balance at the end of each month.
- Limit how many times your credit is reviewed
- Pull your own credit report once a year to ensure accuracy and limit fraud
As you can see, credit is important if you want a mortgage. Whether you are new to credit, have been doing everything right or fell on some hard times – I can work with you and provide some solutions that best suit your needs.
A great big thank you to those who posted questions they would like answered. I will respond to other mortgage questions in subsequent articles so please keep them coming by facebook (https://www.facebook.com/OttawaMortgageAdvisor?fref=ts) or direct to my email firstname.lastname@example.org
If you have any other questions or would like to discuss your credit or mortgage opportunities, don’t hesitate to contact me.