27 Apr How Credit Scores Can Affect Your Mortgage Application
Did you know that lenders check credit scores to decide if a mortgage application should be approved or declined?
When you apply for a mortgage, one of the first things your lender does is look up your credit score. Your score is, in essence, a number that gives a quick snapshot of how well you manage your finances. Credit scores can range from about 300 to 900 points. The higher your score, the better.
So what are lenders looking for when they check your credit score? Large financial institutions, like our Canadian Big Five Banks, want clients to have credit scores over 650-680 points. Anything below that score is considered too risky.
Those who are refused a mortgage with a traditional lender are forced to go elsewhere. Since the big banks won’t issue a mortgage to someone with a lower credit score, that person may need to deal with a secondary or private lender. And since these loans are more risky, lenders offset the risk by charging higher interest rates.
Credit score problems can happen to anyone. Earlier this month, one Globe and Mail writer described his credit score headache in: How a simple credit error can ruin your home-owning dream. It’s hard to believe that one missed bill could cost someone their mortgage, but it happens on a daily basis.
How can you avoid credit score problems?
The best way to avoid problems is to know what’s in your credit report. TransUnion Canada and Equifax Canada are the two credit bureaus most used by lenders. Request a copy of your report from both bureaus and check them for mistakes.
If you find a problem, know that you’re not alone. Up to one third of credit reports contain some sort of error. While many are minor, some are important enough to negatively impact a credit score. Report any mistakes right away – the credit bureau’s website will explain which forms you need to complete to dispute a mistake. Don’t forget to include any supporting documents you may have.
The other way to avoid credit score problems is to stay current on all of your payments. There’s no minimum dollar amount or cut-off date when it comes to reporting to a credit bureau. That means one small unpaid balance can be quickly turned over to a collection agency, and can end up wrecking your credit score.
Mortgage payments, rent, car loans, credit cards, even cell phone and gym membership bills can all affect your credit score. You’ll increase your score by paying at least minimum payments by the due date. Being late or missing payments lowers it, sometimes drastically. If badly timed, a dip in your credit score could mean a denied mortgage application – even if your income can support the payments.
Unsure if your current credit score might affect your mortgage application? Contact us today for a free consultation. One of our mortgage agents can review your financial situation. We’ll let you know if you qualify for your dream home!