How your Credit Score affects your Mortgage Application

[MortgageQueen]

How your credit score affects your mortgage application.

Did you know you know you cannot access the best advertised mortgage rates if you have a poor credit score? Check out the minimum credit score you need and how to improve yours.



When it comes to obtaining a mortgage in Canada, a lender will carefully consider your credit score when reviewing your mortgage application. So, what goes into a credit score? There are five different factors that go into your credit score, and understanding them will help keep your credit score healthy so you can access the best mortgage rates when the time comes to buy a home.


The five credit score factors are:


1. Payment history: The bulk of your credit score is made up from your history of delinquent, past-due and late payments. If you miss a payment, your credit score takes a big hit. That means a missed payment of $1.00 is still scored negatively, even if it's only a dollar. Your credit score also factors in the frequency at which you miss payments.


2. Amounts owed: This portion of your credit report tracks the total amount of your debts. This can include credit card debt, student loans, mortgages and lines of credit to name a few. It also keeps track of who you owe and for how long. Your utilization of credit plays a major role, which is your balance divided by your available credit. The popular myth is that bigger dollar amounts affect your score, when in reality, it is only part of the equation. Having a $1000 credit balance at the end of the month is better if you're available credit is $100,000 versus only $5,000.


3. Length of credit history: Also important to your credit score is the age of each credit account in your name as well as the account activity on them. To help improve your score, it is better to keep older credit cards open because their age benefits you. For credit cards that are no longer in use – it is best to close them as to help prevent fraud.


4. New Credit: The number of times you apply for credit, whether it's for a car loan or store credit card, will affect your score. Each time someone other than yourself accesses your credit report - your score takes a hit.


5. Types of credit used: The greater the variety of credit accounts you have (line of credit, car loan, mortgage, etc.), the better your standing. The reason is because it shows that you can handle re-occurring monthly obligations (revolving credit) and control the access you have to your available credit. However, having too much credit can mean a lower score because it can signal that you have unhealthy borrowing habits. Lenders like to see that you can responsibly manage your debt.


Some other tips:


- Avoid signing up for promotional store credit cards because the more times your credit is accessed, the more harm your score takes. Plus, the teaser rates or ‘gift' come at a hefty price in the form of inflated interest rates as high as 30% or more.


A minimum credit score of 650 will likely let you access the best "A" Lender rates through a Mortgage Broker. A score lower than 600 may require you to seek financing from a ‘B' lender, who will enforce stricter rules and charge more to get financing because you pose a greater risk of default.


Contrary to popular belief, a bigger down payment or better credit score (above the required minimum) will not impact your negotiations for a better mortgage rate. If you want the best mortgage rate, the best thing you can do is to compare mortgage rates across all lenders or have a mortgage broker do it for you.

[Giseledta]

thank you for the info.

[VeeVee]

Great Info thanks!

[Snow Queen]

Thanks for the info!

[Minou]

How do I easily check my credit score? It was over 800 when we applied for financing to increase our mortgage to move to a new house last year, so I'm not sure what impact the increase has had! I want to buy a new vehicle this year (I've had the old one for 11 years).

And oh, man... you don't want us to apply for a store credit card, but I'm itching for a Kohl's or Macy's card... the coupon offers would make cross-border shopping wonderful (Don't worry, I'll hold back until after I buy a car! And I do pay my credit cards off by the end of the month!)

[marstec]

How do I easily check my credit score? It was over 800 when we applied for financing to increase our mortgage to move to a new house last year, so I'm not sure what impact the increase has had! I want to buy a new vehicle this year (I've had the old one for 11 years).

And oh, man... you don't want us to apply for a store credit card, but I'm itching for a Kohl's or Macy's card... the coupon offers would make cross-border shopping wonderful (Don't worry, I'll hold back until after I buy a car! And I do pay my credit cards off by the end of the month!)

You can get a free credit report once per year from two places: TransUnion and Equifax. The free one will not have your fico score. Make sure you read the instructions over carefully before submitting your application...they will find any way to delay your application unless you go with the paid version (that was our experience, anyway). I think if you are willing to pay, you can get all this information fairly quickly online.

[Shwa Girl]

Mortgage Queen, we have been using credit less and less the past 5 months. We are trying to pay with cash whenever we can. Does this hurt our credit score?

[MortgageQueen]

How do I easily check my credit score? It was over 800 when we applied for financing to increase our mortgage to move to a new house last year, so I'm not sure what impact the increase has had! I want to buy a new vehicle this year (I've had the old one for 11 years).

And oh, man... you don't want us to apply for a store credit card, but I'm itching for a Kohl's or Macy's card... the coupon offers would make cross-border shopping wonderful (Don't worry, I'll hold back until after I buy a car! And I do pay my credit cards off by the end of the month!)

Minou. . . .your increased mortgage should not affect your score.

[MortgageQueen]

Mortgage Queen, we have been using credit less and less the past 5 months. We are trying to pay with cash whenever we can. Does this hurt our credit score?

While I 100 percent back you on that "idea", you might want to go about it a bit differently. NOT using your credit will in fact lower your score as there will be nothing to base your spending habits on. Stick to the idea of paying for stuff with "cash in hand" but play the system to work for YOU. Use your credit card for your groceries. . .then go home and pay it. No harm, no foul. . .and you've maybe collected points on your card and are still using "cash".

[Shwa Girl]

While I 100 percent back you on that "idea", you might want to go about it a bit differently. NOT using your credit will in fact lower your score as there will be nothing to base your spending habits on. Stick to the idea of paying for stuff with "cash in hand" but play the system to work for YOU. Use your credit card for your groceries. . .then go home and pay it. No harm, no foul. . .and you've maybe collected points on your card and are still using "cash".

Good idea. We will take cash to the store - usually RCSS or NF. We will pay with our PC card and get points + bag points. Then we will go to the in store bank machine and pay the PC card balance with cash in hand. Like the idea of earning points -- getting paid to shop.

[MortgageQueen]

Good idea. We will take cash to the store - usually RCSS or NF. We will pay with our PC card and get points + bag points. Then we will go to the in store bank machine and pay the PC card balance with cash in hand. Like the idea of earning points -- getting paid to shop.

Exactly!!! That's the smartest thing you can do!