We've had 'free' money for quite a while. And even with interest rates going up, I'd say we still have 'cheap' money. However, the purchase price you ultimately can afford based on your monthly payments is even more critically assessed these days. Much like your income and down payment, your individual credit score is a major financial component of qualifying for a mortgage when looking to buy a home.
Your credit score will be a main criteria Lenders will examine when you apply for a mortgage, so it’s important to ensure your score is in good standing before embarking on the home purchase process. But what exactly is a credit score, and what sets a good score apart from a bad one?
What is a credit score, and why is it important?
In simple terms, a credit score is an evaluation of how you maintain and utilize credit, such as credit cards, loans, mortgages, and other credit facilities.
Many people don’t realize their credit score is one of the biggest indicators when it comes to the mortgage qualification process, and could impact the interest rate you pay.
It's one of the very first things a bank or a mortgage broker will look at and it's equally as important as your income or being able to afford a mortgage. Many mortgage products are driven by credit scores to determine what interest rate you're offered, as well as your eligibility.
A score of 680 and above is the sweet spot that’ll give you access to most mortgage products out there — anything less than this might limit your options. If you have a score of 600 or less, you may be looking at higher risk-based pricing on your mortgage and interest rate offerings.
Your credit score is determined by a number of factors, such as your credit payment history, the amount of credit you have available, and how long you’ve had it for. Having a healthy credit score demonstrates to a lender you can meet your payment commitments over time. It shows that you are responsible and have a track record of owning up to your obligations and paying as agreed
What factors determine my credit score?
One of the most influential factors is your payment history, which includes making sure you pay your debts on time. Thirty-five per cent of your credit score is based on payment history. If you can’t pay off your credit card in full, at least make the minimum payment by the due date to keep your score in good shape. Having a public record of being in collections or bankruptcy may also impact your credit score.
Another factor is how you use your credit. You’ll want to avoid charging up to the maximum amount or upper limits of your credit card. Keep your credit charges to around 30% of your limit each month. Thirdly, your credit score is influenced by how much credit you have available. Using credit or not having any at all doesn't show that you have any payment history. So, having a history of varied credit use, such as a couple of credit cards and a car loan, proves you have that.
How long you’ve had access to credit is also important, as the more time you’ve had credit history, the better. The longer you show a history of repeating good credit, the better it will be for your credit score.
Finally, if a Lender makes an inquiry on your credit, it only accounts for 10% of your overall score. Some consumers get concerned when they’re shopping for a mortgage worrying that they’re going to take a hit on their credit score. Don't be overly concerned if a lender is making an inquiry as part of the mortgage process. However, this is not the time to be making huge purchases on credit or applying for a lot of other kinds of credit, as this will result in multiple back-to-back inquiries.
How can I improve my credit score?
If you’re planning to buy a home, but aren’t sure how your credit score stacks up, speak with a mortgage professional who can help you find solutions for tweaking your credit score. In some cases, you may need to address items in collections, pay down credit limits, or make other changes to bump up your score. If you're thinking about financing a home, or refinancing, It's never too soon to start 'the conversation' because there are likely solutions to most situations. It's about sitting down with the right mortgage professional to map it all out for you. I'm incredibly fortunate to be able to introduce you to the Lenders and Mortgage Professionals who I trust implicitly to take care of you as I know they'd take care of me. All you have to do is email or call me and I can recommend who would be best to talk to and get the wisest advice.
As well, it could take time to improve your credit. Credit is reported on a month-by-month basis, so it may take a few cycles or more to get your score where you want it to be. In cases where a home buyer needs to secure a mortgage quickly with their current credit score, a knowledgeable mortgage professional can explore different options.
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