Are you thinking about putting your home up for sale in the spring and buying another property? Maybe you’d like to move to a better neighbourhood. Maybe you’re buying a bigger home to accommodate a growing family. Whatever the reason is, unless you can afford to pay for your new home in cash, you’ll need to take out a mortgage.
When applying for a mortgage, lenders consider several factors: your income, the size of your down payment, the property itself and last, but certainly not least, your credit score. It can be easy to overlook your credit score, since after all, we don’t learn about credit scores in school. However, that would be a big mistake! A good credit score can mean the difference between getting a mortgage at a low-interest rate and having to pay much more.
Let’s take a look at how important your credit score is when getting a mortgage.
What is credit and why does it matter?
Your credit profile is essentially made up of two parts: your credit report and credit score. Your credit report is sort of like your report card in school and shows the times you’ve been granted credit – things like your phone bill or maybe a student loan. It also includes your credit history, along with some of your personal information, like your address.
Then there’s your credit score. It’s the three-digit number that mortgage lenders care so much about. Your credit score is calculated based on six different factors:
- Payment history (35%) – How good you are at paying your bills on time.
- Credit utilization (30%) – How much available credit you’re using out of the total amount available to you.
- Age of credit history (15%) – The age of your oldest account.
- Credit inquiries (10%) – A credit inquiry is when a bank or lender makes an inquiry about your credit to determine your creditworthiness. This is called a hard inquiry, which can slightly negatively affect your credit score. A soft inquiry, like checking your credit score with Borrowell, won’t affect it.
- Total number of accounts (10%) – It’s beneficial to have two or more credit products.
- Public records/derogatory marks – Bankruptcies and derogatory marks can have a series impact on your credit score.
Your credit score carries a lot of weight in the eyes of mortgage providers. Keep reading to learn how to improve it!
Why does your credit score matter when getting a mortgage?
As mentioned, lenders consider several factors when considering to approve you for a mortgage. While a good credit score can help you get approved for a mortgage with the most favourable terms and the lowest mortgage rate, a poor credit score can lead you having to pay a higher mortgage rate, not to mention lender fees.
The reason is simple. When your credit score is low, it’s low for a reason. A mortgage represents a lot of borrowed money. Before lenders will approve you for a mortgage, they want to know you’re a responsible borrower. However, if you have a history of making your debt payments late or not paying them back at all, you pose a higher risk to the lender. As such, you’ll pay a higher mortgage rate.
Top tips to improve your credit score (before the house hunt)
The good news is, you have what it takes to improve your credit score to ensure you get the best mortgage rate.
1. Pay your bills on time
There’s no better time than the present to set up pre-authorized payments on your bills. Paying your bills on time accounts for 35% of your credit score, so it’s incredibly important to make your payments on time. This includes loans, credit cards, utilities, cell phone, and insurance. If you have trouble keeping track of your bills, check out Borrowell Boost – Canada’s first predictive advance and bill tracker. Join the waitlist today!
2. Watch your credit utilization
As discussed above, your credit utilization is the amount of credit you’ve used out of the total amount available to you. For example, say your credit card balance is sitting at $500 and your credit limit is $1,000. Your utilization for that card would be 50%. It’s recommended to keep your utilization ratio below 30%!
The bottom line
A good credit score is very important when getting a mortgage. Even if you earn a decent wage and you’ve saved a sizable down payment, if your credit score is low, it can cause you to pay a higher mortgage rate or not be approved at all. Like most things, what gets measured gets managed. Check your credit score for free with Borrowell to start monitoring it today!
Borrowell helps people make great decisions about credit. With its free credit score and report monitoring, automated credit coaching tools and AI-driven financial product recommendations, Borrowell empowers consumers to improve their financial well-being and be the hero of their credit. Borrowell is one of Canada’s largest financial technology companies, with more than one million members.