Understanding Your Credit Score

One of the important factors on your journey towards home ownership is understanding your credit score. 

Some people don’t pay much attention to their credit score until they begin the mortgage discussion. But, I promise your credit score is one of the most important factors when it comes to qualifying for a mortgage at the best rate – and will help you have the most purchasing power.  Having a high score, will dictate your ability to secure a competitive mortgage interest rate. Plus it could save you thousands of dollars over the life of your mortgage. Several factors affect your credit score, so let’s dive into the four C’s of this score.

Lets break down the 4 C’s of credit score in regards to your mortgage.

Character

This component of your score is determined by your money habits, and the ways in which you manage your debt.  When lenders are considering a borrower’s credit character they’re looking at:

• Whether you pay your debts on time, and if you have an current or previous payment delinquencies
• Your total outstanding debt debt
• How you use the credit that’s available to you

Now, what can you do to improve your credit character?  I’d try:

• Make sure everything that reports on your credit bureau is being paid prior to the due date.  The MOST common late payment I see on a credit report is peoples cell phone bill, so set a reminder in your calendar each month to pay this guy!
• For any revolving debt, like credit cards or lines of credit, try to use less than 70% of the credit limit of each of these.  For example, if your credit card limit is $1000, make sure to keep the balance below $700 at all times.
• Need a quick boost to your credit score?  Pay revolving credit down to 30% for an instant score increase!
• Do you have any collections or late payments?  A great mortgage broker is going to ask you why these occurred.  An explanation to the lender about what was happening in your life at this time, can also be the difference between a mortgage approval, or decline.

Capacity

This refers to your ability to repay the loan.  For your mortgage qualification, I’ll always collect your income confirmation upfront.  The reason for this is to be sure we’re meeting all the debt to income requirements set by lenders. As well as maximize the amount of home you’ll qualify to buy by understanding all our options for your financing.  Things you can do to increase your credit capacity are:

• Stay at a job long term.  This shows lenders that you have stable income and are a good risk for a mortgage
• Keep all your pay stubs
• Be sure to file your taxes on time, so that your most current income has been files with Canada Revenue Agency (this is especially important for those who are self employed).

Capital

This refers to the amount of money a borrower has for down payment.  A larger down payment always means less risk in the lender’s eyes, as the more of your own funds you invest into a purchase, the less likely you are to not repay the mortgage.  Your down payment savings also are an indication of your mortgage management skills, as saving is tough!  As your broker, we’ll always have a conversation about your down payment options, so that we can present your capital position to mortgage lenders as positively as possible.

Collateral 

The collateral for your mortgage will be the home you choose.  Lenders are going to scrutinize the following factors when they consider which homes they’re comfortable financing:

• How old is the home?
• Is the home a stick built home, or a mobile home?
• Are you buying the land as part of the home purchase, or does the property sit on leased land?
• How is your home serviced?
• Where is the home located?

For the collateral component of your mortgage, have a quick conversation with your mortgage broker about the short list of homes you’re considering when buying, to be sure they have a mortgage solution in place for the home you decide to purchase.

Understanding the four C’s of credit, and taking action to make sure you’re in a position to buy, can happen well in advance of buying a home.  By working together to ensure your set to purchase a home when you’re ready to do so, will alleviate any stress that can arise with credit surprises.  A misstep in any one of these areas could be detrimental to your efforts of getting a mortgage, so call me to make a plan today.