How to Build or Repair Your Credit Score So That You Can Get the Best Mortgage Rates
Only one-third of Canadians check their credit score before applying for a mortgage.
Even fewer actually know what factors can improve or damage their credit score. This article will ensure you have a good understanding of these facts so that you’re not surprised by needing to pay a higher mortgage rate.
Having good credit could also potentially save you several thousands of dollars on your mortgage. Your credit score is a key factor in accessing the best prime mortgage rates. For example, a poor credit score can mean you pay four to six percent interest on a mortgage instead of two and a half to three percent. To put that into perspective, two and a half to three percent on a $500,000 mortgage can mean paying a whopping $1000.00 extra per month for 25 years or more! Got an extra $300,000 lying around?
If you don’t want to add more costs and stress to an already complicated mortgage application process, you’ll want to make sure your credit score is above 600 (ideally 650). You’ll also want to make sure your credit report is free of sneaky “lender notes” (and we’ll explain what those are in just a moment).
How to Check Your Credit Score
Check your online banking or credit card statement. Recently, many credit card companies, banks, and loan companies have started providing credit scores for their customers.
Use a credit score service or free credit scoring site like Borrowell. It will be within 30 points accurate of your actual credit score pulled on Equifax
If you have extra money to spend and want to go straight to the source, purchase credit scores directly from Equifax.
Maintaining a Good Credit Score:
The Secret to Making Your Credit Work For You - See the 4 Forgotten Factors in Our Forty Five Second Tik-Tok Video.
To be honest with you, the exact formula that Equifax and Transunion use to rank your credit score is a bit of a mystery. But it’s still important to have a partial understanding of how it works so that you can have it work for you instead of against you. The aforementioned credit bureaus use the following factors in credit score calculation.
Payment History (35 percent of score)
What: Your history of paying bills on time is weighted as 35 percent of your total score.
How to maximize: Paying your bills on time is the most important factor for a good credit score so remember to set and forget! Set up automated pre-authorized payments with payees so your bills are automatically paid on time without you needing to remember multiple due dates.
Credit Utilization (30 percent of score)
What: Out of your total credit available, how much are you using? Maxing out your credit cards will damage your score. It’s suggested that you use no more than 40 percent of your available credit.
How to maximize: If you have a combined credit limit of $20,000 between credit cards, you should not be carrying a combined balance of more than $8000. Keep track of your credit limits on a notepad or excel documents. If necessary, strategize ways to keep your expenses down.
Age of Credit History (15 percent of credit score)
What: The age of your oldest account matters because lenders like to see that you’re responsible and consistent over time.
How to maximize: It’s beneficial to have a long-standing history of paying your bills on time with the same creditors, so try to limit ever closing down credit cards or lines of credit and make sure you can maintain it over time.
Credit Inquiries (10 percent of credit score)
What: When a bank or lender makes an inquiry about your credit to determine your creditworthiness, you will get points against your credit score.
How to maximize: Limit the “hard” credit pulls on your credit score, which is done when you apply for credit cards and lines of credit. Mortgage credit pulls are actually considered “soft” credit pulls and don't negatively affect your credit score. Also, when done within a 45-day window, multiple credit checks from mortgage lenders only count as a single inquiry. Another example of a “soft credit pull” is when Equifax or companies like Borrowell let you check your own score.
The Total Number of Accounts (10 percent of credit score)
What: Too few or too many credit vehicles open and active credit cards can influence your credit score. Vary your loans between car loans, different types of credit cards such as department store cards, and mobile phone plans.
How to maximize: Aim to have different kinds of credit so your credit mix stays varied.
The Bottom Line: Take these factors into consideration to increase and keep your credit score at a minimum of 650. This will allow you to qualify for A lending, which offers the best and lowest mortgage rates. If your score is below 650, don’t stress: it’s not impossible for you to get a mortgage. However, you will likely need to resort to Alternative or Private lending, which offers higher interest rates. Note that many private lenders are okay with credit scores as low as 600 these days.
Watch 4 Minute Video: How Credit Score is Calculated For Your Mortgage :
What Are Credit Score or “Lender Notes” And How Do They Damage Your Credit Applications?
I had to learn the hard way what lender notes were. It happened when I applied for a harmless Amazon credit card to boost my credit mix. It got rejected, even though I almost have an 800 credit score! What the %#*#?
After asking the credit card company why they rejected my application, they informed me about lender notes, which referred to instances where I took 30, 60, or 90 days to pay a bill. The credit card company sends these notes to the credit bureaus and it takes six years for these to be wiped clean even if you take all measures to ensure your credit score skyrockets.
The solution was a little grim. I had to call every individual credit card lender I had and argue why I had missed the payment and why they should retract their lender notes. A lot of the lender notes were on annual credit card fees on cards I never used. The lesson here is to keep a close watch on credit cards— even if you’re just using them for air mile signup bonuses.
Two Common Credit Score Myths Busted
Myth: “Checking my credit score when I apply for a mortgage is harmful”.
Truth: Is it? You get docked two out of 900 points for the first pull, so checking your credit on the mortgage side by a broker has a minimal impact on your credit score. If your credit does get checked more than once in a 45-day window by mortgage companies, Equifax only counts it as one check.
Myth: “Bankruptcy permanently ruins your credit”.
Truth: Only if you don’t plan on living another seven years. After six or seven years, the bankruptcy record and all records of bad debts (that are the same age) will typically be removed from your credit report and give you a fresh start. If you haven’t declared bankruptcy but have a low score, there are some great ways to rebuild it.
Don’t Panic: You Can Repair and Rebuild Bad Credit With The 2/2/2 Rule
If you have filed for bankruptcy or a consumer proposal, you will need to repair your credit in a strategic way.
What mortgage lenders want to see:
Two forms of revolving credit such as credit cards
Each revolving credit needs to have at least a limit of $2,000
You must then build a clean payment history for two years of not missing payments
The credit score will also go up as you start to follow the five categories mentioned at the start of this article. Don’t forget to correct any old or incorrect reporting on your credit score by contacting Equifax or Transunion to have it removed. (Truthfully, you’d be surprised at how many things they mess up.)
If you cannot access a credit card because of a bankruptcy or consumer proposal, you can typically apply for a $500 “secured” credit card through your bank, which is secured against a separate $500 cash deposit you give them. While this defeats the main purpose of having a credit card, it will boost your credit score and still get you points and access to common credit card perks.
Have You Filed a Consumer Proposal or Filed For Bankruptcy? Here’s How You Can Still Get a Mortgage
If you have a very low credit score and absolutely need to find the money for a closing property, there are some Alternative and Private lenders who are more lenient with low credit scores as long as you have a larger down payment (typically in the 20-25% range).
In order to understand what lenders will consider in your unique situation, you need to have a mortgage broker on your side. The mortgage broker must know these lenders well and have the skills to build up your story in a way that convinces lenders to consider your case.
THE BOTTOM LINE
If you’re in the large bucket of people who don’t know how credit score works— or worse, what their score even is, you may be in for an unpleasant surprise when you apply for a mortgage.
Getting a Canadian mortgage in the new decade of 2020 is infinitely harder to get than the last decade, so make sure that the credit score portion of the mortgage process is one you pass with flying colors. After all, you’ll need to conserve your energy to go into the tougher parts of the mortgage process, such as having adequate income and saving the right down payment amount.