Home Buyer's Guide - All About Mortgages
A Step-by-Step Guide on the Home Purchase Process
What effects your credit and how to improve your credit
Understanding what you can afford and what is looked at when getting a mortgage
What is required for a down payment on a home and other solutions to obtaining the required funds
Understanding the basic Mortgage Options
A list of the costs you should be prepared for
Credit
Take a look at the 5 Factors that affect your credit.
Your credit score, also known as a beacon score, is generated by 2 main organizations in Canada; Equifax and Trans Union. They have a system which tracks any personal loans, credit cards, or lines of credit that you have. The system gives you a score somewhere between 300-900, with 300 being the worst and 900 being the best. In order to obtain the very best mortgage rates, you generally need to have a score of 650 or better, however exceptions are made when it makes sense. If your credit score is not high enough, there are a whole other group of lenders willing to help you out, but generally at a higher cost.
5 Factors that affect credit
Payment History
This is the most important factor involving your credit. It shows the lender that you can manage debt and make payments on time. Here are some of the things that affect your credit:
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Late or Missed Payments
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Collections
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Bankruptcy
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Repossession
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Foreclosures
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Consumer Proposals
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Credit Counselling
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Judgements
Tips to improve your credit score
Always make your payments on time. If you cannot pay the full amount, make at least the minimum payment.
If you think you will have trouble paying a bill, contact the lender right away. See if you can work out a special arrangement to repay your debt.
Oustanding Debt
Use of available credit is the second most important factor. It is also called “credit utilization.” What this means is the outstanding balance of your credit sources compared to your available limit.
What counts toward your credit score is how much of your available credit you actually use, not your credit limits by themselves.
When you use a large percentage of your available credit, you may be viewed as relying too much on your credit and lenders may see you as a greater risk
Tips to improve your credit score
To improve your credit score when applying for credit, make sure your oustanding balance is no more than 75% of your available credit.
For example: If you have a credit card with a limit of $5,000 make sure your balance below $3,750 (75 percent of $5,000) when you apply.
Length of Credit History
Lenders want to see how well you can manage credit over a long period of time.
Your credit report takes into account:
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Length of time since accounts were opened
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Time that's passed since the last activity
Tips to improve your credit score
Consider keeping an older account open even if you no longer need to use it, especially if there is no annual fee. Use it from time to time to keep it active.
The longer your (good) history, the better your scores
Inquiries and New Credit
When you apply for new credit, it is recorded as an inquiry on your credit report.
It can have a negative impact on your credit if you make numerous inquiries and open too many new accounts at one time. This can be a concern to lenders as it may appear you are living beyond your means and relying too heavily on credit.
Your credit report takes into account:
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Number of accounts you've recently opened
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Proportion of new accounts to total accounts
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Number of recent credit inquiries
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The time that's passed since recent inquiries or newly-opened accounts
Tips to improve your credit score
Limit the number of times you apply for credit in a short period of time.
Types of Credit
When it comes to applying for a mortgage lenders typically like to see 2 different types of credit that have been reporting for at least 2 years. Revolving Credit, which would be a credit card or a line of credit, and Installment Credit, which would be a personal or auto loan.
Tips to improve your credit score
Having a mix of credit products could get you more points, but don’t go overboard! Make sure you can afford to pay back any money you borrow. Otherwise, you could end up hurting your score by taking on more debt than you can handle.
