Everyone is aware that credit score affects mortgage rates, but to what extent?
It is not impossible to purchase a home with low or bad credit, but it can be much more expensive.
We’ve just written about how to get quick cash with bad credit, but in this article, we share how important your credit score is for mortgage rates.
Credit scores play a big role in getting approved for a mortgage.
Even then, you may not realize how important they are when it comes to mortgage rates and other aspects of the mortgage application process.
Your credit score will dictate the type of mortgages that you can be approved for, the amount of money that you can borrow, and the rates that you will pay.
If you want to get a traditional mortgage, you will have to have a credit score above 700, which shows creditors that you know how to manage your credit and makes them more confident when lending to you.
A low credit score indicates that you have mismanaged your credit, which makes you a risk to the lender.
To minimize their risk, it is likely that you will have to pay a higher mortgage rate.
Credit scores are built and tracked based on information collected by credit reporting agencies, which are also known as credit bureaus.
The information collected comes from companies and institutions that lend your money or issue your credit cards like banks, retailers, and credit unions.
In Canada, there are two credit reporting agencies: Equifax Canada and TransUnion.
At your request, they will send you a free copy of your credit report every year and give you access to your credit score at any time for a small fee.
It is recommended that you check your credit score annually to ensure that there are no mistakes on it.
What Are The Factors That Influence Your Credit Score
Every credit reporting agency has its own formula when it comes to calculating credit scores.
However, they all take into account the following factors.
1. Payment History: Missed payments, bankruptcies, and written off debts will reduce your credit score.
- Credit Utilization: How much debt you have in comparison to your available credit will impact your credit score.
- Credit History: How long you’ve had your account open. The longer you’ve had them, the better.
- New Credits: How recently and how often you’ve pursued new credit. NOTE: Checking your credit score will not impact your score.
- The Types of Credit You Have: It is recommended that you have a mixture of credit, such as a credit card, and a line of credit.
How Does Your Credit Score Affect Your Mortgage?
Your credit score is very important because it dictates which lenders you can get a mortgage from and what the interest rates on your mortgage will amount to.
Prime lenders, like banks, will give you a mortgage if your credit score is above 700 but will consider the applications of those with credit scores that fall between 600 and 700.
However, if your credit score is within the 600-700 range, other areas of your application will need to be stronger in order to make up for it.
A lower credit score poses a greater risk, and to compensate for that risk, some lenders might charge you higher interest rates.
If your credit score is lower than 600, some lenders will not be willing to lend you any money at all.
Loan to Value Ratio
Your credit history can impact your loan to value ratio (LTV), which is the amount of money that you can borrow on the property of your choice.
If you qualify for a 95 LTV, that means you can get a loan for up to $285,000 on a $300,000 property.
With certain loan programs, mortgage lenders will cap the percentage they will offer you on the LTV if your credit score is on the lower end of the spectrum.
This is particularly true for “non-conforming” loan products.
For instance, if you have an 800 credit score, the lender will allow you to borrow up to 95% of the property’s value, but if you have a credit score of 600, they may restrict you to no more than 80% of the property value.
Your Credit Score May Prohibit You From Certain Programs
If you have a low credit score, it may limit the programs available to you. This particularly pertains to non-conforming loans.
They are allowed to make their own rules, and often prohibit giving loans to those with poor credit scores.
Your Credit Score Can Determine the Leniency a Lender Will Have With Your Application
When it comes to securing a mortgage, your credit history is not an isolated issue in the approval process.
If you have a strong credit score, it will allow lenders to be more lenient in other areas, such as your income and downpayment.
This can be particularly helpful to those that don’t have a traditional work history or are self-employed.
Poor credit history, on the other hand, means that lenders are more likely to adhere to strict guidelines when determining your eligibility.
For instance, your income level may not be where it needs to be for the loan that you are applying for, the lender may still approve the loan if your credit score is 800.
If your credit score is below 600, in addition to a weak income, they may determine it is too high of a risk and decline your loan application.
Ultimately, the higher your credit score, the more flexibility your lender will have when it comes to other requirements like the length of employment.
Your Credit Score Can Impact Your Private Mortgage Insurance
Many people aren’t aware that their credit histories can affect the rates that they will pay for private mortgage insurance (PMI).
It is a requirement that you carry PMI if you make a downpayment that is less than 20% of the purchase price of your chosen property.
The lender requires you to have PMI because it acts as insurance in the event that you default on the loan.
Private mortgage insurance lenders will use your credit history as a determining factor when determining the price of that insurance.
If your credit score is below 650, your rate could be up at 1.15 percent per year.
How Can You Improve Your Credit Score?
There are a number of reasons why your credit score may be low, you may have recently moved to Canada, or have fallen into some unexpected circumstances that may have impacted your finances.
Whatever the reason, there are things that you can do to improve your credit score.
1. Tackle Your Collection Account First
If your credit history has unpaid bills that have been sent to collections, try to pay those off as soon as possible.
Credit scoring algorithms have been altered to reward you for paying off these amounts more than they did in previous years.
When dealing with collection accounts, it is crucial to get everything in writing and pay attention to your credit report.
When you pay off a collections amount, make sure that you get a letter stating that they have received the payment and will update your credit report to reflect this.
There are some cases where a collections agency will be willing to work with you to settle your debts and negotiate an amount that is less than what you owe.
Again, in this situation, make sure that you get something in writing that shows that the debt has been settled and the account is closed.
Note that if you do decide to negotiate your debts, it may appear on your credit report as a settlement that may not have as a positive effect as it would if you had paid the full amount.
2. Pay Off Debts That Are Reaching Your Credit Limit
It’s a well-known fact that even if you pay your credit bill on time, it’s never a good idea to keep the balance near the maximum limit.
The recommended ratio is 35%.
3. Ask Your Credit Card Companies to Help You
When it comes to paying off your credit card balances, you have a lot more resources available to you than you may think.
Up to nine out of 10 credit cardholders were able to get their card issuers to waive a late payment by calling and asking.
Your credit card issuer wants to maintain a good reputation for customer service and satisfaction.
If you need assistance paying off your credit card, give them a call to see what they can do for you.
4. Get a Higher Credit Limit
Getting a higher credit limit with an existing account can help you improve your credit score.
It works out well in your favor because you owe the same amount, but it is against a higher credit line, which improves your credit-to-debt ratio.
This option may not be available to you if you have existing credit problems, because you need to have good credit in order to get more credit.
If your credit score lies between the 650-700 and you want to improve it, this is an easy way of improving it, and there are a number of credit card companies that may be willing to work with you.
In order for this approach to work, you need to be very disciplined. You need to be able to maintain your spending habits, regardless of the fact that you have access to more credit.
5. Don’t Apply for New Credit Carelessly
Credit bureaus are informed any time you apply for new credit and applying for new credit too often will not help you increase your credit score.
Try not to apply for new credit, unless it is absolutely necessary and that includes lines of credit.
6. Two Credit Cards
Try to have at least two credit cards that you use on a regular basis.
Make sure that you use them each month, even if it’s for small purchases, and pay off the balance at the end of each month.
7. Pay off Balances on Time
Always make sure that you pay your credit card bills on time, and make sure that you pay at the very least the minimum payment.
In the event that you are unable to make a minimum payment, let your lender know immediately so that they can accommodate you by extending your payment due date.
8. Establish your Credit History
Having a long credit history will help you to improve your credit score. If you can, don’t cancel your oldest credit card, even if you don’t use it often.
The longer your credit history is, the better your credit score will be.
Remember that no two people are the same, and that applies to credit as well.
Just because you may have the same credit score as someone else, it does not mean that you will get the same offers or be qualified for the same mortgage rates.
In order to learn more about what your options are with your credit score, contact Collin Bruce.
Their team of experienced and qualified mortgage specialists can help you with purchasing, renewing, and refinancing your mortgage.
Whatever your situation, they will be able to find you a solution.
Colin Hegarty is a content writer for BreezeMaxWeb that helps businesses showcase their brand through enticing copy. When he’s not working, you can find him playing net in a local beer league or biking around the city.