Why Are Credit Scores Important for Obtaining a Mortgage?
In the world of personal finance, credit scores are all the rage and for good reasons. Credit scores can be the deciding factor on whether or not you’re able to achieve your financial goals. A big goal that many people have is to purchase a house. Just like all other financial products, credit scores have an impact on the type of mortgage you receive and the financing conditions.
To learn more about the relationship between mortgages and credit scores, continue reading below.
Credit Scores and Mortgages: The Basics
Your credit score is important when it comes to mortgages because it impacts which lender you can obtain a mortgage from. The most ideal lender to get a mortgage from is major banks, such as TD or RBC. You can also obtain a mortgage from a trust company or private lender, but these options are less favourable.
In addition to the lender, your credit score will also determine what interest rate you receive. The reason why it’s best to get a mortgage from a major bank is because they offer the lowest interest rates. Trust companies have medium level interest rates and private lenders have the most expensive interest rates. Low interest rates are important for mortgages because the cost of financing is amplified for large assets like houses.
What is the Ideal Credit Score for a Mortgage?
To obtain a mortgage with a major bank, the ideal credit score is above 700. The higher your credit score is, the better chances you’ll have at getting approved with a major bank. As for trust companies, the ideal credit score range is 600 to 700. Trust companies specialize in individuals with poor credit. Finally, individuals with credit scores below 600 will likely have to work with a private lender to obtain a mortgage. Keep in mind that the above credit scores are benchmarks. Lenders vary in their approval requirements and processes which means that the ideal credit score for each lender will vary too. A good starting point for credit scores is 700 if your goal is to obtain a mortgage. With that in mind, it’s good practice to boost your credit score as much as possible before you apply regardless of what your value is.
What Else Do Lenders Consider?
Lenders rarely make an approval decision based solely on a credit score. They will evaluate other aspects of your finances to gain a complete picture of whether or not you’re a good candidate for a mortgage. In addition to credit scores, lenders also consider the following:
● Income and expenses
● Stability of income
● Employment history
● The amount you’re requesting to borrow
● The amount you’re going to put down
● Current debt levels
]● Amortization period of the mortgage
What Can You Do To Improve Your Credit Score?
Thankfully, bad credit is never forever credit. If one of your financial goals is to purchase a home, it’s time to start working on your financial habits which will improve your credit score over time. Remember, patience is key. Credit scores won’t increase overnight, it requires dedication to change your financial habits and stick to them.
Below are methods you can incorporate into your daily financial routine to improve your credit score:
● Always pay bills on time and in full
● Pay off outstanding debt
● Avoid using more than 30% of your available revolving credit limits
● Only apply for new credit when you absolutely need it
● Regularly review your credit report for errors or signs of fraud
● Consider credit building products if you’re rebuilding or establishing credit
Find the Right Mortgage for You
Personal finance essentially boils down to finding the right solutions for your unique financial position. The same is true for mortgages. Whether your credit is excellent or poor, do your best to find a mortgage product that works the best for your circumstances. This can take time, but a mortgage is a serious commitment so you should think about your options carefully. After obtaining your initial mortgage, you can refinance once your credit and other financial circumstances have improved. This is a great way to get a lower interest rate or a more favourable payment amount.
The bottom line is credit scores are important for obtaining a mortgage because they determine the lender you can work with and the interest rate you’ll get. Mortgages are likely the largest financial commitment you will manage in your whole life. For this reason, having decent credit will make the mortgage commitment easier to handle