How your Credit Affects your Ability to Qualify for a Mortgage

Is your credit in order?

Client's often get caught up in the excitement of searching for a new home before ensuring that their finances are in order. Occasionally it can go so far as to putting in an offer and not realizing until quite late on in the game that something that occurred recently or even a few years back is still showing up on their credit bureau and impeding their chance at securing a mortgage.

Credit scores are broken down as follows:

1. Previous Credit Performance: 35%

• Pay your bills on time. If you pay your bill 3 days early, they receive it 3 days early and this can increase your credit score by 3 points.
  

2. Current Level of Indebtedness: 30%

• Keep your credit card at 75% of the maximum by making minimum payments. (ie: 10K limit keep at or below 7,500). This shows that you are managing your credit.

3. Length of Time Credit Has Been in Use: 15%

• Most lenders want to see "2 active trade lines for 2 years or more" when applying for a mortgage as they are reviewing your past history and willingness to repay when deciding to fund your mortgage or not.
• A credit card from a major bank has much more merit than a Capital One card that anyone can get.

4. Pursuit of New Credit: 10%

• A major advantage to using a Mortgage Broker is that when we access your credit bureau report we have options to bring your application to many different lenders. If you were to negotiate your own mortgage rate by visiting each local bank branch yourself, each bank would then in turn access your credit bureau. Over time, multiple "hits" on your credit lower your score.
  

5. Types of Credit Available: 10%

• Revolving credit (credit cards & lines of credit) affect your score more on a bureau than an Installment credit (monthly car payment) which has a fixed monthly amount. The "danger" in revolving credit is that when we determine your "debt service ratio" to determine your mortgage pre-approval amount we are only looking at outstanding credit balances and not the limit. A lender sees this access to unused credit as a possible risk factor.
  
• A variety of credit is desirable, ie: a credit card (revolving credit) and a car payment (installment credit) display a good combination of credit.

General Tips

- If you do not have any established credit, the Home Trust Secured Visa is an excellent option to begin building or re-establishing your credit.

This is the preferred card to re-build your credit as Home Trust regularly reports to the credit bureau, whereas a Capital One card does not (not even after 1 year - you would be no further ahead).

Please contact myself at leah@mortgagegrp.com for more information as I can send you the required form to help you get started.


- Consider seeing a credit councilor for advice. I would recommend Credifix Inc - Riley Wight - rileyw@shaw.ca or 403.277.4357 (HELP)

They can multiple resources availabe to them to work in your benefit (ie: can remove old collections so that they do not appear on your bureau for 7 years, which is the normal length of time).


Tip from Riley: do not cancel an old credit card as it will lower your score. Simply renew it and don't use it if that is the case.