Before you start house hunting, be sure to check your credit report and tackle credit issues early to improve your score. Doing so could save you thousands and help you qualify for the best rates.
Why does your credit score matter to lenders when shopping for a mortgage?
Your credit score lets a lender know what kind of risk you’ll be and ultimately determines if they should lend you money or not. A lender looks at both your credit score and your credit report to determine your creditworthiness.
The better your financial profile is, the lower the interest rate you will be offered! Even a small interest rate difference could mean tens of thousands of dollars saved over the lifetime of a mortgage or loan.
Think of it this way. You know that friend you have that always asks for money but never pays you back? Would you want to lend them money again? Probably not. To you, they haven’t demonstrated they’re responsible with money. So it’s less likely you’ll loan that friend money ever again unless maybe you charged interest! Lenders, of course, work the same way.
A poor credit score shows lenders that you might not be able to pay them back, or you might be late paying them back. This makes it less likely to get approved for a mortgage and if you do, it might be stuck with a high interest rate.
On the other hand, a high credit score shows lenders you are responsible with your money and have a proven track record of making payments on time. This translates into lenders being more willing to approve you for a mortgage at more favourable rates.
What should your credit score look like to receive the best mortgage rates?
In Canada, credit scores typically range from 300 to 900 and are determined by two major credit bureaus: Equifax and Transition. Borrowell works with Equifax to provide you with your Equifax Risk Score (ERS 2.0) – a popular and legitimate score used by many banks and lenders.
When mortgage shopping, the higher your score, the better.
High scores (700 points or more) generally indicate you’re less likely to default on your loan or mortgage payments. On the other hand, low scores indicate you have a history of missed payments, late payments or you’ve defaulted on a loan.
Below is a breakdown of credit score ranges and what each range means when qualifying for a mortgage.
● 741 or more:You have an excellent credit score! You can consider yourself a credit rockstar. This is where the best mortgage rates live.
● 713 to 740:You have a good credit score. You should expect to receive very good interest rate offerings and a variety of credit products.
● 660 to 712:This is considered fair or average to lenders. But once you get to 660, you’re entering into average credit score territory.
● 575 to 659:This is a below average credit score. If you’re below 640, you may have trouble getting a conventional mortgage from a bank or online lender. Consider working on improving your credit score with the tips below.
● 300 to 574:Your credit score is poor and needs improvement. You’re considered to be a high-risk borrower and if you’re approved, you could end up paying a lot in interest. Keep reading for some improvement suggestions below!
For every 20-point increment your score drops, you’re likely to see small changes in the interest rate you’re offered. Lenders adjust the rate they offer each time your credit score moves up or down by 20 points.
How to improve your credit score while on the house hunt
If your credit score could use a little TLC, there are steps you can take to improve it.
Instead of settling for a higher interest rate, consider putting off your home purchase and working on improving your score instead. Here are some tips to help:
- Check your credit report for errors and fix them as soon as possible.
- Pay all bills on time and in full if you can.
- Pay down credit card balances to below 30 percent of your limit.
- Avoid applying for new loans, lines of credit, or credit cards. Each application is a hard inquiry and reduces your credit score. Try to avoid cancelling credit cards or lowering your limit. Doing so increases your credit utilization and impacts your credit score negatively.
- When your credit score has improved, rate-shop within a 30-day window. Spreading out inquiries hurts your credit score more.
If you’re looking to improve your credit score and financial well-being in general, check out the new Borrowell Credit Coach! Molly, the Credit Coach, provides a free credit check, monitors your credit over time, analyzes your profile, and even sends you tips on what you can do to improve your credit score.
Meet your Credit Coach today and start improving your score.
Borrowell helps people make great decisions about credit. With its free credit score and report monitoring, automated credit coaching tools and AI-driven financial product recommendations, Borrowell empowers customers to improve their financial well-being and be the hero of their credit. Join the over 850,000 Canadians that have received their free credit score from Borrowell today!