April 6, 2012
What does your credit score mean for your mortgage application?
How important is your credit score when applying for a mortgage? The answer: very important. Mortgage lenders will use your credit score as one of the most important factora when considering your mortgage application. So, you want to keep your credit score as healthy as possible to be able to access the best mortgage rates available.
There are five different categories that make up your FICO® credit score. We’ll detail them below so you can use the information to improve your score.
1. Payment history
Your payment history indicates whether you have been keeping up with your debt payments on time. This category keeps track of any past-due and delinquent payments. Missing a payment is viewed negatively, regardless of the amount. Lenders assess the ‘likelihood’ of you missing a payment and evaluate your risk to them.
2. Amounts owed
This factor compares what you owe against your borrowing limit. The utilization of your credit is calculated as your balance divided by your available credit. One common myth is that bigger borrowing amounts negatively impact your score, when in reality, it’s only part of the equation. For example, a $500 credit card balance at the end of the month is better if your credit card limit is $2,000 versus only $1,000 because you are using a smaller portion of the credit available to you. As a general Rule of Thumb, try to keep your credit utilization below 80%.
3. Length of credit history
Also important to your credit score is how long you have been using credit products. This measures how long the various accounts have been opened and their activity. It is actually better to keep older credit card accounts open because their age is a benefit; however, if you no longer use them, it is better to close them to help prevent fraud.
4. New Credit
This shows the frequency at which you seek new credit and how you handle those accounts once they are opened. Anytime you request new credit, a credit check is performed. The number of times you apply for credit, whether it’s for a car loan or store credit card, will affect your score. Too many credit applications are viewed negatively. However, it is okay for multiple lenders to access your credit score within 30 days for the purpose of comparison shopping for the same product such as a mortgage loan. Typically, these are treated as a single inquiry and will have little impact on your credit score.
5. Types of credit:
This takes into account the type of loans you have undertaken, such as lines of credit, student debt, credit cards, mortgages and car loans. Having a wide variety of credit accounts shows that you are able to manage recurring monthly obligations; however, too much credit can signal unhealthy borrowing habits and an over-reliance on credit.
Overall, lenders like to see that you can responsibly handle your debt when assessing your mortgage application. A minimum credit score of 600 will most likely gain you access to the mortgage rates you see advertised on bank and broker websites. A credit score less than 600 will require financing from a ‘B’ lender, who may demand a bigger down payment and charge an interest rate premium because you pose a greater risk of defaulting. So, handle your credit accounts with care because mortgage lenders will peer into every detail of your credit score before they approve your mortgage application.
This article was provided by RateHub.ca, a web platform that compares Canadian mortgage rates supported with mortgage education and home buyer resources.