Credit Score & Mortgage Rates

A higher credit score opens the doors to better loans and lines of credit, as it suggests to lenders and credit companies that you are good at making reliable, on-time payments of your debts. Everybody accrues debts that they must pay, be they monthly recurring debts or one-time debts that are quickly paid off. What matters is how effectively you manage those debts.

According to our friend, a mortgage agent in Toronto, Your effectiveness at doing so is measured by two agencies in Canada: Equifax and Transunion. Their reports are typically very similar and are based on the same information:

  • Payments history – This reflects the payments that you’ve made to lenders or creditors.
  • Diversity – This refers to the diversity of your credit, meaning that it’s beneficial to have more than one credit account.
  • New inquiries – Whenever your credit score and credit history are pulled by a lender or creditor in evaluation of your qualifications for their services, your credit score will take a small hit. Applying for a lot of credit in a short period of time reflects badly on your score.
  • Credit length – How long have you had your existing lines of credit? The longer, the better, as this shows good credit habits and a good relationship with an existing creditor.
  • Debt – This refers to how much debt you are in and compares it to how much credit you have.

If any of these five traits of your credit report throw up red flags or cause a dramatic dip in your credit score, lenders and creditors are less likely to want to work with you at a more favorable rate. This means that if your score is very low (under 650 or so) you could reasonably be considered a risk by a mortgage lender. In turn, they can deny your request for a mortgage loan. If they do still say that you qualify for a mortgage with them, your interest rates may be much higher.

How Can I Build a Healthy Credit Score?

Fortunately, credit scores are flexible. They change over time as your financial circumstances change. As you pay off more debts, your score will inevitably increase. If you continue taking out lines of credit that you cannot pay for, your credit score will plummet.

The best approach when considering obtaining a mortgage toward home ownership is to get well acquainted with your personal finances and credit score ahead of time. You can request a copy of your credit report from Equifax. This report will show you where your credit score has taken the biggest hits, and will make you aware of any mistakes that can be rectified with the credit reporting agency.

If improving your credit score is high on your list of priorities, consider these tips for getting that number closer to 900:

  • Request copies of your Equifax and Transunion reports at least once per year to keep on top of any reporting errors that might be made.
  • Avoid frequently applying for new lines of credit. Apply for them only when it is absolutely needed.
  • Pay off your debts as quickly as possible to avoid having them burden your credit score for any longer than they absolutely have to.
  • Don’t max out your credit cards. Try to keep their remaining balance at 50% or above at all times.
  • Avoid canceling credit cards whenever possible.

When you know how to maintain a healthy credit score, you can start working proactively toward increasing it before you reach out to a lender for a home mortgage. In doing so, you will see lower rates and more favorable loan conditions compared to if you sought out the mortgage with a lower credit score.