How Your Credit Score Affects Your Mortgage Qualification

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Overview Of How Credit Score Affects Your Ability To Qualify For Mortgage

Your three-digit credit score says more about you than a picture. An expert can conclude much about your life with only your credit score.

Mortgage lenders use this credit score to determine your creditworthiness for a mortgage based on your ability to pay back the loan as agreed.

Credit Score In Canada

In Canada, credit scores range from 300 to 800. A mortgage lender will be comfortable letting you borrow money at a competitive rate with a credit score of 680 and above. Equifax and TransUnion consider credit scores in this range as good to excellent.

On the other hand, a lower credit score implies that you have had issues managing credit in the past. If approved, you may have to pay a higher interest rate.

The Credit Reporting Machine

Each month, credit-reporting agency partners – banks, credit unions, shops, and other lenders – track your credit products (credit card, auto loan or personal loan) to credit agencies.

Information captured on your credit report from these lenders is the payment status, missed payments, overdue payments, debts in collection, consumer proposal filing, bankruptcy filing and others.

Your credit report is like your report card on how you have managed debts.

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Why The Credit Score You See May Be Different From What A Lender Sees

Let’s continue the credit reporting machine explanation above.

The credit-reporting agencies apply the information in your credit report to a mathematical formula to generate your three-digit score. Each reporting agency has its proprietary formula. That explains why your Equifax credit score may differ from that of TransUnion.

Also, you get different credit scores for another purpose, even with one reporting agency. The credit score used for your mortgage application may differ from that used for your auto loan application.

Over time, these reporting agencies have improved the sophistication of their mathematical formulas. Some lenders have followed suit to adopt the credit reports generated with the new method; others have not.

Lenders are not obligated to adopt a new credit scoring model. Equifax is now in its Equifax 9.0 edition, but most mortgage lenders in Canada are still using the Equifax 8.0 edition. The argument is that the 8.0 version puts more weight on essential factors to assess your ability to repay a mortgage as required.

Factors Affecting Your Credit Score

The factors used in calculating your credit score are;

Past Payment History – overdue payments, consumer proposals, collection, written-off trades, missed payments, late payments, or bankruptcy will lower your credit score.
Credit Utilization – This measures the percentage of your debts to available credit. The lower the ratio, the better. It would be best if you tried maintaining a maximum credit utilization ratio of 35%.
Credit History – This factor assesses the length of your oldest trade. The longer you have had a credit account open, the better.
New Credit Requests – How often and how recently have you applied for a new credit product. Note that there are two types of credit checks – hard and soft. A hard check occurs when a lender checks your credit score to provide you with a new credit product. On the other hand, a soft credit check describes when you check your credit report. Soft credit checks do not impact your credit score, while hard credit checks impact your credit score.

Types of Credit – A mix indicates that you can manage different credit products. This does help to increase your credit score. But don’t go overboard with the credit product. You should keep a balance based on your repayment capacity.

How Your Credit Score Affects Your Mortgage

Your credit score will determine the type of mortgage you can qualify for, the approximate interest rate you will get, the minimum required down payment, and where you should go for that mortgage type.

There are three types of mortgage lenders:

Prime Lender

These are institutional mortgage lenders like your bank, credit unions, and other monoline lenders, such as First National, MCAP and more.

Credit scores above 640 are good scores for prime mortgage loans. With a 680 and above credit score, you should expect a low-interest rate, quick qualification, and good mortgage terms.

Alternative Lender

These are institutional lenders like EQB, B2B, Home Trust, Haventree Bank, Bridgewater Bank and more.

These lenders offer mortgage products for individuals with less-than-stellar credit scores. The sweet spot for most alternative mortgage products is credit scores in the 500 to the 640 range.

If you rank here, expect to pay a slightly higher mortgage rate. You will need a high down payment or equity in the property of 20% of the property value, minimum, to qualify for an alternative mortgage lender.

Private Lenders

These are loans offered by non-institutional lenders. The money can be from your friend or family member. Several special-purpose vehicles, called Mortgage Investment Corporations (MICs), operate in the private mortgage space.

Your credit score has a low impact on the decision to approve you for a mortgage. Applicants with credit scores below 500 tend to use private mortgage lenders.

How To Improve Your Credit Score

Here is the list of things you can start doing today to improve your credit score:

Always try to have two or three active credit products at all times. Use these credits each month and pay back the amount used. This action creates activities for the lenders to report on to the credit agencies.
Ensure to make at least the minimum payment of your credit products and pay on time. Let your lender know right away if you can’t make the minimum payment. Some may be willing to accommodate you by extending the due date.
Try not to use more than 35% of your total available credit.
Avoid cancelling your old credit cards. The longer you hold on to your most recent loan, the better your credit rating.

Limit how often you apply for credit.

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