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When lenders are considering borrowers for a mortgage their goal is to minimize their risk. They use your credit score to decide if they can trust you to pay back their money. In Canada, credit scores range from 300 to 900. For your mortgage credit score, you will require a minimum of 640. However, some lenders will consider people as low as 620, while others are more demanding and won’t qualify borrowers below 680.
There are other considerations lenders will look at, such as how high your debt is. Lenders consider your credit score and debt when setting your interest rate and mortgage terms. They also look at the amount you require to purchase your home and will often expect you to have a higher credit score when loaning a higher amount of money.
The Canadian government also requires borrowers to undergo a “stress test” for mortgages. You have to qualify for current and future rates and payments in anticipation of prices rising.
Credit scores are calculated as follows:
Payment history shows how quickly you repay credit and accounts for 35% of your score.
Used credit vs. available credit shows how much credit you have available, what your credit limits are for each lender, and how much of that credit has been used up. This accounts for 30% of your score.
Credit history shows how long you have had your loans and accounts for 15% of your score.
Public Records will show if you have ever declared bankruptcy, gone to collection or demonstrated any other risky behaviour and accounts for 10% of your credit score.
Credit inquiries refer to credit checks performed. Whenever a credit check is run, it is recorded as an inquiry. Although this only accounts for 10% of your credit score, it has an important purpose as it shows lenders you might be “credit-seeking,” which is viewed as an early sign of financial distress.
All of these factors are taken into consideration when calculating your score. Credit bureaus then manage them.
If you find your credit score is low, make efforts to improve your credit score before applying for a mortgage. You can use these tips:
Start paying all of your bills on time including your utility and cell phone payments
Work on paying off your debt as quickly as possible
Keep your balances low for credit cards and all loans and credit to lower your debt ratio
Avoid opening or applying for any new credit including credit cards
Keep all your unused credit accounts open as this keeps your credit limit high, but the amount of credit you have used low
Look for inaccuracies on your credit report and dispute them right away to ensure you are reflected in the best possible light
These tips will help you slowly improve your credit score, and you can apply for a mortgage once you are at a respectable level.
Even if you have bad credit, it is possible to buy a house. Working with our mortgage brokers, you can find lenders who are willing to work with you.
You can increase your chances of qualifying for a mortgage by improving your credit score using our tips above. Another good plan is to try to save for a larger down payment. The more money you can put down, the better chance you have of qualifying for a mortgage. As well, a larger down payment provides you with a shorter mortgage payment period. It also allows you to make smaller payments if you prefer to amortize your high-risk mortgage over a longer period of time.
If you would like more information on bad credit and how it affects your mortgage, speak to our mortgage brokers today.
There are a number of things to consider when trying to maintain your credit. Lenders look to this in order to get an idea of how your re payment history is, and how you manage debt. They also look at credit utilization history, and the number of inquiries made in the last little while. Call us today to discuss in further detail.
Here are a few ideas, more of which we would be happy to discuss with you in detail:
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