How Your Credit Score Affects the Home-Buying Process

Posted by Justin Havre on Friday, November 30th, 2018 at 12:03pm.

Credit Score to Buy Home in CanadaIt's no secret that the Cochrane Canadian housing market is tight. Borrowers need to make themselves very attractive to banks to be approved for a loan, especially in cities like Vancouver and Toronto. Part of this is securing a high credit score. Understanding what goes into a credit score and how it affects an individual's mortgage outlook is imperative for informed home buyers.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

What is a credit score?

A credit score is the three digit number distilled from a number of factors that influence an individual's creditworthiness. These include:

  • the length of their credit history.
  • how much debt they carry.
  • their payment history.
  • the mix of credit that they use.
  • how many recent inquiries there have been into the individual's credit history.
  • whether there are public records of issues like bankruptcies or foreclosures.

In Canada, credit scores range from 300 to 900 points. They are created from data from two credit reporting bureaus, Equifax and TransUnion.

How high a score is necessary?

Under new credit rules in Canada, a borrower must have a credit score of at least 600 to qualify for a mortgage worth $1,000,000. However, experts say that higher scores are necessary to get approved by banks. Experts say that, to win approval, a borrower will need a score of at least 650. Some say that it may even take minimum scores of at least 680 to get approved.

However, there's more to a mortgage than whether an individual is approved in the first place. Credit scores also determine how big a down payment is required and how much a borrower will pay in interest. The higher an individual's score, the lower their interest rate. Throughout the life of a mortgage, this can make a difference of thousands of dollars. Any score over 780 is considered an excellent credit score and is most likely to garner the best mortgage offers.

How can someone learn their credit score?

Credit scores are based on reports from Canada's two credit scoring agencies: Equifax Canada and TransUnion Canada. Individuals can get a free copy of their credit report by mail by submitting identification along with some basic information. It takes about three weeks for a credit report to arrive. It is important to check with both bureaus. One credit report may reflect information that does not appear on the other report.

If an individual needs an additional credit report after getting their free annual report, they can still request a report by mail. There is a $20 fee for additional credit reports.

How can someone improve their credit score?

An individual's credit score is based on factors that accrue over a period of years. It can be difficult to make a significant positive change in a credit score in a short period of time. However, there are a few factors that are in an individual's more immediate control that can bring a credit score up.

The first thing that someone who wants to improve their credit score should do is check their credit report for errors. Common errors include reporting debts more than once or failing to show a settled debt as paid. These are both errors that can artificially reduce a person's credit score. If an individual who is working to improve their credit discovers that they have errors of this kind, they should contact the credit reporting bureaus to have them removed.

If someone knows that they will want to apply for a mortgage within a year, reducing the balance on their credit cards is a great place to start. What portion of an individual's available credit is being used is a good indicator of their ability to handle more debt. People who are going to apply for a loan soon should also be careful about applying for new credit. This can include new credit cards or refinancing current loans. Each inquiry temporarily lowers credit scores, but will fall off after a period of time.

Good education surrounding issues like credit is a must for those who wish to buy a home. By understanding what goes into a high credit score and what is realistic given any individual's circumstances, borrowers can get a better understanding of where they stand and can make the best choices for their financial futures.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

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