Have you ever wondered how a credit score rating can help or hinder you from getting a mortgage loan on your new home? The credit score is one of the most important measures of financial stability that you have and can mean the difference between getting approved or denied for credit-based products. Without it, you will have a difficult time getting large loans.

What is a Credit Score? 

A credit score, or rating, is a number between 300 and 900. If you have a rating above 700, lenders can see that you are good at managing your money and can pay back a loan. Low credit scores mean you have not handled your money well, making you a greater risk to the lender. You may still be able to get the loan, but you will be required to pay a higher mortgage rate. 

A credit rating is determined based on information sent to credit reporting agencies, also known as credit bureaus. Credit bureaus lend money or issue credit cards. These companies include banks, credit unions, retailers and other financial institutions. Canada has two credit reporting agencies: Equifax Canada and TransUnion

At your request, either one of these agencies will send you a free copy of your credit report and will also give you access to your credit score online for a small fee. 

What Affects My Credit Score?

Your credit scores are evaluated based in each credit reporting agency’s unique formula. Factors that contribute to the determination of your credit score include: 

  • Credit Utilization: How much debt you currently have will affect your credit score. Consider using less than 35 percent of your available credit at a time.
  • Credit History: The length of time you have had your accounts is another factor taken into consideration. The longer your accounts have been open, the better your credit score will be.
  • Payment History: If you have delayed or overdue payments, overdue accounts, bankruptcies or forgiven debts, your credit score will be decreased.

Does Your Credit Score Affect Your Mortgage? 

Your credit score plays a huge part in determining which lenders you can get a mortgage loan from and how high your interest rate will be. Prime lenders will give you a mortgage if your credit score is above 700. If your credit score is between 600 and 700, they will consider your application but will not necessarily accept it. If you score is between 600 and 700, the other areas of your application will need to be solid in order to make up for your low credit score. 

A low credit score means that you present a greater risk to the lender. To lower the risk, certain lenders will charge a higher interest rate. If your credit score is well below 600, some lenders may refuse to loan you any money at all. In general, lenders will allow you to get a mortgage based on the information below: 

Prime Lender (major banks)

Prime lenders will loan money to those with a credit score between 600 and 900. The mortgage rate will be around 3.49 percent. 

Bad Credit Institutional Lenders (trust companies) 

These institutions exist to help those with poor credit. They will lend money to people with a credit score between 550 and 700 at a mortgage rate of 5.49 percent. 

Private Lenders (private companies or individuals) 

A private lender will loan funds to those who have a credit score below 600. The mortgage rate will be very high between 10 and 18 percent. 

I Have Bad Credit. What Can I Do? 

If you have a low credit score or need to establish credit in order to apply for a mortgage, there are several steps you can take to boost your score. 

Try to use two or more credit facilities every month. Keep your balances paid off to maintain a healthy credit score. In order to have the best possible credit score, it is best to have a mix of credit. This can include auto loans, credit cards and credit lines.

Make your payments early if you can. If you can’t, at least pay them on time. If for some reason you are unable to make the minimum payment, inform the credit facility in advance to allow them to extend the due date of your payment.

Never use more than 35 percent of your available credit. As an example, if you have a credit limit of $10,000 and a line of credit with an available limit of $18,400, do not borrow more than $9,940 at a time.

Try not to apply for credit too often. Professionals suggest that you wait at least six months between applications to increase your chances of getting approved. However, if you have an outstanding credit score, a history of on-time payments and a high income, you can apply more frequently. 

In order to receive a mortgage loan, it is important to have a healthy credit score. Even if your score is less-than-perfect, it is still possible to get a loan and even to rebuild your credit score. If you are looking for mortgage advice, one of our expert vendors will be glad to assist you.

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