How to build a good score
You won’t get a mortgage with bad credit
A strong credit rating can be a big plus when you’re applying for a mortgage.
First, you’ll have more lenders salivating over you to offer a loan.
Even better, you may snag a lower interest rate on your mortgage, and that can translate to big savings over a 25-year amortization period.
If you can’t qualify for a mortgage through a large bank or a credit union, by contrast, “you may have to use a private mortgage lender and chances are you’re going to pay a higher interest rate, “says Wade Stayzer, vice-president of retail and investment services at Meridian Credit Union.
“They want to be compensated for the perceived increased risk.” You may also have to scrape together a higher down payment to reassure your lender, and in the worst-case scenario, “you’re going to need a cosigner or guarantor.”
That means it’s a good idea to know your credit score well in advance of applying for a mortgage. It’s the number assigned to you to measure your credit-worthiness based on your past dealings with lenders. It can range between 300 and 900, with higher scores indicating lower risk.
“Most lenders consider a credit score of 600 or less to be someone who has credit challenges,” says Stayzer. “The first thing you should do in that case is stop the house search and put a plan in place, because you likely won’t get a mortgage if you’ve got really bad credit.”
The good news: even if your score is less than optimal, you can build it over time.
Here’s what your credit score is based on and what you can do to make yourself look better on paper in advance of buying a home. 35 per cent: Do you pay your bills? The largest component of your credit score, this tracks late payments, or worse, unpaid bills.
Your score will depend on a number of factors, says Paul LeFevre, director of operations for credit reporting agency Equifax Canada Co.
Among them: when the incident took place, whether this is a one-time thing or a chronic pattern, and the severity of the ‘delinquency.’
“Was it a $200 administrative account closing fee that the consumer wasn’t aware of? Or was it $28,000 worth of delinquent payments? That’s going to make a difference,” explains LeFevre. As a rule of thumb, he adds, the more recent the incident, the more negative the influence on your score. Typically late payments are purged from your file after six years. Rx for improvement: Always pay your bills on time. “I’m amazed at the number of times I hear people say, ‘Well I’m just saving up so I can pay my bill all off at once,’ ” says Stayzer. “No. You need to make the minimum monthly payment on all of your debt, every month. No exceptions.”
If you tend to lose track of bills or pay late, he advises, arrange for automatic payments to be made monthly through your bank or credit union.
30 per cent: How much available credit do you have? Lenders are wary if you’re maxed out on all your accounts — particularly if you’ve got a lot of high-interest credit card debt.
The ‘utilization rate’ portion of your credit score is the amount of outstanding balances on all your credit cards divided by the sum of each card’s limit. Let’s say you have two cards, each with a $5,000 limit; one has an outstanding balance of $2,000 and the other has $3,000. Your credit utilization rate would be 50 per cent. Rx for improvement: You’ll see minor improvements by dropping your utilization by as little as 10 per cent, but if you can reduce it by 25 per cent or pay off those loans entirely, you’ll see a dramatic improvement. In addition, says Stayzer, don’t apply for new credit in the six months before you apply for a mortgage. And if you do pay off a credit card, don’t close the account. “That helps with capacity,” he explains. “You have unused credit.”
15 per cent: How long have you been borrowing? This can work against younger home buyers because it’s based on how long you’ve been managing credit cards and loans.
“If you’ve managed your credit products really well, but you’ve only had them for four months, compared to four years you’re scored lower,” says LeFevre. Rx for improvement: “The way you build your credit history is by taking out credit,” says Stayzer. “We have lots of folks who say, ‘Well, I should be OK because I’ve never borrowed money before.’ Wrong.”
Stayzer’s advice: “Go out and make a nominal purchase worth, say $100, on a credit card and then take a few months where you pay the $10 per month. You will pay a little bit of interest, but it shows the credit bureau that you have an ability to repay on a consistent basis.”
10 per cent: Who’s inquiring about you? This score is based on the number of lenders inquiring about you. “If you’re applying for seven different credit cards, that will have a significant impact,” says LeFevre. The exception: when you apply for an auto or mortgage loan, all the inquiries are usually automatically combined within a certain period of time — typically about 15 days. Rx for improvement: By all means shop around for a mortgage. As LeFevre puts it: “You don’t have to panic when you’re making that major purchase, but you want to make your inquiries within a reasonable period of time.”
10 per cent: What kind of debt you owe? As a rule of thumb, lenders view car loans and mortgages as ‘safer’ than credit card debt.
Says LeFevre: “As consumers we tend to pay our mortgage or rent and car loan first because we need to live somewhere and we need to get to work.”
What’s more, he says, payments are typically deducted directly from your paycheck. Rx for improvement: Pay off your credit cards. It’s the wisest thing to do anyway. After all, you’re taking on a major debt in the form of a mortgage — it’s time to get your house in order. What’s your score? You can order your credit report and score online for $16.95 (TransUnion) or $23.95 (Equifax). A free copy of your credit report is available through Equifax (1-800-465-7166) or TransUnion (1-800-663-9980). Count on 10 days before it arrives in the mail.