How does credit score affect your mortgage rate in Canada?
Let’s face it, for most people the most expensive buy is their home. It is fair to say, one of the most important decisions too. The question most buyers ask is “how will my Credit score determine my mortgage rate in Canada“?
Canadian Mortgage Finder as the name implies focuses on “mortgages for everyday Canadians”. Their aim is to provide sensible, mortgage advice backed by excellent products. The advice given is both educational and will save you money. Indeed they will help you to find a mortgage that is best suited to you. They do this by placing you in a better informed position.
There is a ton of information available on the internet about everything. When it comes to mortgage financing, it is even more so. This is because more and more consumers are depending on online mortgage services. The information made available is from many different sources. Some of these are more credible than others. Be sure you check out the source you decide to use.
You have decided to enter the real estate market to buy a home, investment property or second home. Where do you start? easy, You need to have a plan with a beginning and an end. You need to make a plan, and work your plan. Start by knowing what you bring to the table as qualification ability. This means, knowing your credit Fico score. You need to know your repayment history, and amount of debts. Get a handle on your monthly payment obligations, also.
Why is knowing about your credit important? Your credit score will influence your mortgage rate in Canada. The type of mortgage or lender will determine the down payment, and the borrowing rate you can expect. These are all important elements you need to determine at the beginning. Would like to know about type of lenders and how they can determine the amount of down payment you might need? Refer to our blog, 3 kinds of mortgage lenders in Canada
Your credit score
What does a credit score tell about us? Credit score determines our creditworthiness. How well do we pay our credit obligations, and how likely are we to meet our new mortgage obligation. Banks and lenders use the credit score to determine how strong of a borrower you are. This is important to know when shopping for a mortgage. The higher the credit score, the lower will be the interest you can expect. The lower the score, the higher will be the rate. Higher interest means higher repayment and more total interest costs. How does the bank determine what type of borrower you are? The credit score is a 3 digit number between 300-900. It’s calculated by an algorithm based on many factors. There are 2 credit bureaus in Canada; Equifax and TransUnion.
The score is an expression based on the following factors:
- credit inquiries
- credit mix
- repayment habits or history
- how you use your credit
- derogatory marks. ie. late payments, collections, etc.
What does the credit score tell the bank or lender? The credit score is a measure how well you repay your obligations. It tells how to expect you to meet your existing and new mortgage obligation. The higher the Fico score, the more likely you are a good borrower. The credit score summary:
There are 5 categories or Fico scores the bank, lender, or mortgage broker will consider.
- 760 or more. Credit score is excellent. This is the score you would expect the receive the best mortgage rates.
- 725-759. This is a very good credit score and like the above category you can also expect very good mortgage pricing.
- 660-724. This is a good credit group that can expect to receive good mortgage pricing.
- 560-659. This is the fair group. It is also the first group that might not be acceptable to A side lender. More recent derogatory credit is factors that may be bringing the score down.
- 300-559. This is the challenged or poor credit group. The lower scores indicates there are serious derogatory remarks. Also there could be current credit issues. Borrowers in this group will expect to receive higher rates from Alternative B banks. The lowest in this group may also expect for private mortgage financing.
What can I do to improve my credit score?
There are some things that everyone can do to improve their credit scores. Some may take longer than others, but the results can be very positive with the right approach. Patience and dedication is a must.
1. Get your credit file from Equifax. You may order it online and you can get an updated version of it as you start to make changes. It is also a good idea to check your bureau and make sure that nothing is being reported wrong. 2. Correct immediately debts, discharged bankruptcies or consumer proposals that you have paid. You can do so by visiting this link to Equifax and TransUnion. Correct debts that were part of bankruptcies or proposals but still showing balances. This alone can increase you score in a big way.
3. Credit usage is another significant factor influencing your credit score. This means revolving credit or credit card balances and line of credits, need to be less than 80% of their limit. In fact if you can keep it at 70% of limits even better. This denotes the extent you depended on credit, or your utilization rate.
4. Timely repayments is what keeps your credit score stable or decreases it when you miss or make them late. Pay your revolving credit balances ( credit cards) few days before due dates. It takes 48 hours to receive and post your paying by the receiving institution. If you are having troubles making an installment loan payment, call the institution. Call them before the due date, explain the situation. Tell then when you will make the payment and request they do not mark you late. Keeping in touch with your creditor works well in establishing and maintaining credibility.
Now you have a better understanding how your credit score and mortgage rate in Canada are determined. . The next step is for you to decide how you will go about searching for your mortgage.
There are 2 ways to go about this. Visit your bank or depend on the experienced of a licensed mortgage broker.
If you know your credit is in the lower categories and you will need a special lender, a mortgage broker is you best bet. A mortgage broker has many specialized lenders. A broker can negotiate for you and needs only to pull your credit once. If your credit is in the top tiers, and qualify for mainstream lending, a broker is still a better option for you. They are able to shop and compare many institutions for you and present you with pricing options.
Aldo Mormile, licensed mortgage professional. Has been proving his services for past since 2003.