For many people interested in buying a home, one of the major stumbling blocks can be a damaged credit history. Whether you are a first time homebuyer with a short credit history, have faced financial difficulties in the past, or simply want to boost your credit to get the best mortgage terms possible, here are some ways that you can improve your credit score.
Here’s what you need to know:
- Why are credit scores important?
- How can I check my credit score?
- How can credit scores affect loan-to-value ratio?
- How can you improve a credit score for a mortgage?
Why Are Credit Scores Important?
We all know that credit scores are important. They can determine your eligibility to rent, earn a mortgage, and can even affect employment opportunities.
But some people may not know that your credit score also determines the mortgage rate you will pay, and even how much you’ll pay if you need private mortgage insurance (PMI). For conventional financing, most borrowers will need a credit score above 620 to even be eligible for a mortgage. Higher credit scores will earn you better interest rates.
Additionally, during this time of economic turmoil, banks and mortgage lenders are facing additional risk. Because of this, many home buyers may find that they need to improve their credit scores before they are qualified for a mortgage.
How can I check my credit score?
Order a copy of your credit report from both Equifax Canada and TransUnion Canada. Each credit bureau may have different information about how you have used credit in the past. Ordering your own credit report has no effect on your credit score.
Equifax Canada refers to your credit report as “credit file disclosure”.
TransUnion Canada refers to your credit report as “consumer disclosure”.
How can credit scores affect interest rates?
For example, a 750 credit score might qualify you for a 3.625% rate on a $200,000, 30-year mortgage. This would produce a monthly payment of $912.
On the other hand, with a credit score of 625, the interest rate for that same mortgage might be 4.125%. This would make the monthly payments $969.
This difference in monthly payments ($57 per month) may not sound like much, but over the course of the 30 year loan, that’s an extra $20,520.
How can credit scores affect loan-to-value ratio?
If you want to take out a loan, or borrow against the value of your property, your loan-to-value (LTV) ratio will be calculated. A LTV is the percentage of a property sale price, or appraised value, that you could borrow.
In certain situations, a lender may choose to limit how high a borrower’s LTV can go if their credit scores are low. Borrowers may be disappointed in their LTV if they have a less than stellar credit history.
How Can You Improve a Credit Score for Mortgage Loans?
One of the first ways to improve a credit score for mortgage loans is by examining what factors make up a credit score. From there, you can determine the best practices that will then help turn a score from “eh” to “excellent.”
1. Dispute Mistakes
Mistakes happen, even when it comes to credit scores. Because of this, it’s important that you dispute any fraud or incorrect information. This will improve a credit score for mortgage borrowers, and is a relatively easy way to turn a credit score around. If you asked for a Mortgage Deferral, double check that it is not flagged on your credit score as a missed payment.
2. Pay Off Collection Accounts
The presence of accounts in collection are an instant red flag for lenders. Focusing on paying off collection accounts, no matter how old the account is, or how much is owed will very quickly improve a credit score for mortgage loan qualification.
3. Improve Your Credit Utilization
If your credit utilization is too high, the easiest way to address this is to pay down some accounts, and use less of your credit line every month. However, this isn’t always possible. If you face high credit utilization, you have a couple of options. You could ask for a credit limit increase from your creditors, which would expand your ratio. Otherwise, you could also open a new credit card, and commit to keeping the balance at zero. Both of these methods may have short term negative effects on a credit score, but they will improve a score over the long term.
4. Pay On Time, Always
Paying bills on time may feel like the most basic of credit score tips, but that’s for good reason: it works! Late payments are an instant way to damage a credit score. Therefore, if you truly want to improve your credit score, encourage them to make a habit change.
5. Become An Authorized User On Another Card
It may feel like a drastic measure, but if you are facing a poor credit report, you could become an authorized user on someone else’s credit card. This other, well-managed credit will appear on your credit report, and can improve a credit score for mortgage applications. It’s important that the balance of this card is always paid off, and the payments are always on time–otherwise, you will face even more problems than before.
There’s no doubt that credit scores are important, especially when it comes to getting approved for a mortgage. Improving your credit score can send you on your way to purchasing your dream home.
And just remember, credit score isn’t everything! If you are struggling with a poor credit report or other roadblocks to qualifying for a mortgage, there are resources available to help you.
Improving your credit score can feel like a bit of a mystery at times. But follow the points above and remember these top 3 tips:
Tip #1: Always keep your balances on your credit cards and lines of credit below 50% of the limit. If you have a limit of $1,000 never let the balance go over $500. How much credit you are using at any given time vs your credit limit is called utilization and that makes up 35% of your credit score.
Tip #2: Make your payments consistently before the due date. You need to allow for processing time and missing the payment date by even 24 hours is detrimental to your score. If you’re in the habit of making your payments 1 week prior to the due date, you’ll never be late
Tip #3: Avoid collections, judgements and liens at all costs. Do not wait for credit to drown you and negatively impact your credit report. Get ahead of debt by speaking to your creditors before you are late to renegotiate terms or ask for an extension. Contact your Financial Planner to see if you can make other adjustments or qualify to refinance your credit. Contact Bromwich+Smith’s Debt Relief Specialists for a free, no obligation and personalized consultation.
Come learn with us, with the help of guest experts in consumer credit in Canada, as we explore credit and debt and a host of other subjects centred around helping you manage your money, how to build and rebuild your credit, and what options are available to you when debt takes control: https://www.bromwichandsmith.com/tools/webinars