Canadian residents may want to move from renting to owning a home. In some areas, it may be a great time to snap up an available property and start building equity in a home of your own. One key element that will be reviewed by any potential lender is that of a mortgage applicant's credit score. Potential homebuyers who anticipate requiring a mortgage loan in order to afford to purchase a home need to look at their credit scores and learn more about the relationship between credit scores and mortgage loans. Those with high credit scores may be easily preapproved for a mortgage, reducing the possibility of potential obstacles when working with a seller in competitive housing markets, such as Vancouver and Toronto.
A credit score is only one factor lenders will review when making a decision on a mortgage application. Buyers can do much to improve low credit scores prior to applying for a loan. Understand more about credit scores and how they are necessary to buying a home today.
What Is a Credit Score?
A credit score is a number that is based upon the evaluation of an individual's financial history. A credit report will include information on loans, credit cards, mortgages and payments. A good or excellent credit score will make it easier for an applicant to secure a mortgage loan on favorable terms. Those with excellent credit scores may receive instant loan approvals and may be eligible for lower interest rates on a mortgage loan. Equifax, Trans Union and Experian are three private agencies in Canada that generate credit scores. Trans Union calls their credit score a FICO score and takes into account the five following components when determining a credit score. These components include:
- Payment history
- Credit utilization
- Length of credit history
- New credit
- Types of credit such as personal loans, credit cards, auto loans
These components will also be used with the other private agencies when deciding upon a person's credit score.
Do You Need A Home Mortgage Loan?
A Priddis Greens homeowner may need to go through a few hurdles in order to qualify for a home mortgage loan. A poor credit score or history may make it hard for a lender to justify approving an applicant as they will be seen as higher risk. There may be as much as a 3 per cent difference on a mortgage loan between those with a good credit score and applicants with a poor credit score. Going through the pre-approval process may help applicants identify whether or not their credit score may pose an issue.
How Do Credit Scores Relate to Being Pre-Approved for a Mortgage Loan?
The pre-approval process works as a review of important factors that lenders consider when approving a potential homebuyer for a mortgage loan. Buyers benefit as they can find out how much money lenders may offer to them to put toward a home. Credit score is one area that will be reviewed during the pre-approval process. Being approved during this process does not guarantee that an applicant will be approved for a home loan. This process is most useful for those who want to identify any potential issues and learn how to improve factors important to lenders. A low credit score generally translates to higher risk for lenders. In addition to credit score, lenders will be interested in looking at an applicant's:
- Income situation
- Debt level
- Employment status
Those who have had to make late payments, have had to declare bankruptcy or have had other issues making regular payments on loans may find it hard to be approved for a mortgage loan without taking steps to improve their credit score.
How Can You Find Out Your Current Credit Score?
Potential homebuyers can get a head start on working to improve their credit score, if necessary. It is possible to order a credit report copy and find out more about credit history and any discrepancies or issues. Errors may need to be addressed and individuals may choose to pay down existing debt to make for a better debt to income ratio.
How to Increase Your Credit Score Before Buying a Home
There’s need to let a bad credit score deter potential home buyers from their dream. Even the worst credit can typically be repaired over time. Here are a few things one can do to boost their FICO score before getting serious about applying for a mortgage.
- Dispute Errors: Finding errors on credit reports is not uncommon, and some errors can be so serious that they affect one’s score by hundreds of precious points. If errors are suspected, ask for verification from the credit reporting agency in writing sent certified post.
- Make All Payments on Time: After 12 months of on-time payments, credit scores should increase slightly.
- Pay Down Debt Balances: Pay down any current existing debts as much as possible to create a better scenario concerning documented debt-to-income ratio.
- Have Collection Accounts Removed: Collection agencies showing on credit reports can cost quite a few FICO points. Take efforts to settle with these agents (who will often settle for a lower amount) to pay off balances and boost credit scores.
Homeowners who take the necessary steps to improve their credit score will find that they may qualify for a more expensive home or get a better interest rate on their loan.
Do You Want to Get Your Offer Accepted By a Seller?
Home sellers want to work with potential buyers with good or high credit scores and that have made the effort to get pre-approved. This may make it more likely that a potential buyer will be able to be approved for a home mortgage loan. Such individuals often get priority when making an offer. Sellers do not want to waste time on those individuals with low credit scores or who may not be able to qualify for a mortgage loan, as it may cost them more time and money to eventually sell their home.