Your credit score is an important financial benchmark that lending institutions use to approve a mortgage application. In a nutshell, it’s a three digit number that indicates how you pay your bills. Lenders and creditors look at this number when they are trying to decide whether to approve you for a loan. According to Equifax, there’s a big range in your credit score numbers although 300 to 579 is generally considered poor. Next, 580 to 669 is considered average or fair and 670 to 739 is rated as excellent.
Why is it important to maintain a good credit score during the mortgage borrowing process?
Credit scores are important because the higher your number the better your credit terms. The better your credit score, the more qualified you are for lower interest rates on a loan. That means you’ll pay less interest over the course of the time you borrow the money.
There are a few other reasons why maintaining a good number during the mortgage borrowing process is important.
- Your employment history and record is another key factor when you’re applying for a loan. Having an excellent credit score can help to offset any types of issues you’ve had including layoffs.
- Having a good credit score can also help you out if you have a large debt load with student debt, car payments, and credit cards to pay. If you’re able to juggle those types of debts and make timely payments, your chances for a mortgage approval go up. Still, it’s important to keep in mind that you should use less than 35% of the credit you have available.
- Lenders are usually looking for people who don’t pose a great risk. Those are generally applicants who can show a history of debt management. A score higher than 600 demonstrates your seriousness about paying your bills on time.
It stands to reason that banks and other financial institutions don’t want to lend money to high risk applicants. That’s why you need to avoid the following during the mortgage process.
What actions can negatively impact my credit score during the mortgage borrowing process?
Your credit score needs to be carefully maintained. Some of the things that you can do to improve it are up next. However, it’s important to avoid the following actions that can hurt your numbers during the mortgage borrowing process.
- Not using your credit for a long period of time. Some people don’t use their credit accounts for several months at a time. With no new information to report to the credit bureaus, lenders and creditors might have a difficult time evaluating a mortgage application. Keeping your account active means using your credit every few months in a responsible way.
- Late payments are one of the biggest ways that you can negatively impact your credit score. Payment histories on credit accounts and loan amounts play a big role in putting together your credit scores. There are different kinds of scoring models used. However even a single late payment on loan or credit card can impact your numbers.
- TransUnion, a company that provides credit reports, points out that applying for new loans can play a big role. For example, if you apply for several new credit cards over a short period of time with different lenders, your score can be affected.
Another important factor to consider is your debt-to-credit utilization ratio, which indicates the percentage of your available credit that you are currently using. Lenders often prefer this ratio to be below 30 percent, as it suggests responsible credit management. Keeping this ratio low is one of several strategies to maintain or improve your credit score while you’re going through the mortgage application process.
How can I prevent my credit score from dropping while applying for a mortgage?
While you’re going through the mortgage approval process, you shouldn’t be applying for any type of credit including personal loans or credit cards. Here’s another excellent piece of advice. Generally, it’s not a good idea to make any big purchases within 6 months of signing the mortgage papers. It’s best to wait for several months to demonstrate your ability to repay the money.
Are there any specific strategies or tips for maintaining a good credit score during the mortgage borrowing process?
Trying to reduce any outstanding debts during this time is a good idea. For example, you can knock down credit card debt quickly by paying more than the minimum. Focus on eliminating the smallest and most expensive first before paying other debts.
How long does it typically take for a credit score to recover after applying for a mortgage?
Patience is the key when you’re trying to recover your credit score after applying for a mortgage. It’s important to remember that credit bureaus keep both negative and positive information for a length of time.
Even if you’re rebuilding a credit score after applying for a mortgage, any negative information on loans and credit cards can stay for up to 6 years. Equifax keeps information on credit checks by different lenders for 3 years. Transunion, on the other hand, keeps the same information for 6 years. A consumer proposal can be another headwind on your credit score for a length of time. These proposals for paying off a percentage of your debt can stay on your credit report for either three or six years.
Finally, both the credit agencies, Transunion and Equifax, will remove a bankruptcy from your credit report 6 years after the date where you’ve been discharged. There are some differences depending on the province you’re in and you can see those here .
Mortgage Broker Store specializes in several different mortgage-related products. Mortgage requirements that don’t meet traditional lending institution requirements are one of our focuses. We have private lenders, brokers, and licensed mortgage agents on the team. We can help you prepare for and get a private loan that will suit your needs.