Credit scores are inherently tied to mortgage applications. They create a baseline reference for your lender to review whether you are borrowing responsibly. That is to say that wrapped up in your credit score is insight on:
- how long you’ve been borrowing,
- whether you use your credit regularly, and
- how effective you are at repaying it.
Ultimately, the better your credit score, the better the lending scenario is offered to you. Now that you understand how important good credit is for your mortgage application, let’s break down what that goal really means and what it takes to achieve great credit in the eyes of the credit bureau.
What is a good credit score?
Credit scores range from 250 to 900, with 600 being a significant marker for responsibility. A score of 600 is the minimum value that an A lender would consider. A-lenders typically come with the lowest interest rate offers and no lender/broker fees. Below 600 means that you may have to look at alternative lending options, or create a plan to rebuild your credit over time. It’s worth noting that alternative lenders have a range of creative, highly-regulated solutions that can effectively help a large group of responsible homebuyers to access the housing market.
If you want to learn more about different lenders, read this article: Alternative lenders explained.
Why is a credit score so important for a mortgage pre-approval?
A credit score over 600 qualifies borrowers for CMHC mortgage insurance, in turn allowing them to have a minimum down payment of 5%. A credit score under 600 means that the mortgage consumer will need to have a minimum down payment of 20%.
What are tradelines?
This term is used by the credit industry to reference a “credit account” that has been approved for you and subsequently shows up on your credit report. Examples of tradelines are personal loans, credit cards, or mortgages. Tradelines that demonstrate poor, or risky repayment history will impact credit score negatively and tradelines that demonstrate strong, consistent repayment will impact scores positively.
What’s involved in building a good credit score?
1. Length of time with Credit Bureau
The length of time the credit bureau has been monitoring your borrowing practices has an impact on your score. That means if you have been borrowing money responsibility for six months, that will not have the same positive impact as those who have been borrowing responsibly for six years.
Key credit takeaway? Get credit when you can, and take that responsibility seriously. A well-established timeframe with lots of strong tradelines is great for healthy credit.
2. Utilization of your credit
If you set up credit tradelines and never use them, you aren’t able to demonstrate responsible borrowing practices. That’s why using the credit you’re given is key to building a strong score. That stated when it comes to credit cards specifically, borrowers need to beware of reaching their credit limit maximum on a regular basis. Credit card users who consistently borrow more than 75% of their credit limit are considered high-risk, even if they pay the balance off monthly.
Key credit takeaway? Use your credit when you can, prioritize timely repayment and avoid borrowing your credit limit maximum on a regular basis.
3. Credit repayment habits
The credit bureau is monitoring how effectively borrowers pay down their credit. Specifically, they want to make sure that borrowers make their payments on time, and that the minimum payment is received…at a minimum. Late payments and/or not making minimum payments will negatively impact a credit score.
Key credit takeaway? Endeavour to pay it off every month. Carrying a balance month-to-month is a sign that you are not borrowing responsibly.
What impact does it have when lenders check my credit score?
When applying for a mortgage, a borrower’s credit score will be checked multiple times throughout the process. These “hard” inquiries impact a borrower’s credit report and effectively raise a flag to lenders that you are currently shopping for new credit. Ultimately it is a borrower’s unique credit history combined with the recent timeline of hard inquiries that are assessed for creditworthiness. Hard inquiries for mortgage approval are highly regulated and supported by the credit bureau.
Credit monitoring apps – like Credit Karma or Mint – are not considered to be “hard hits” and are useful tools to monitor your credit health on a regular basis. To learn more about hard inquiries and credit checks, here’s Equifax’s website.
Have credit questions? We can help.
It’s important to keep in mind that a borrower’s credit is not static and there are a number of influences and considerations that go into assessing anyone’s creditworthiness. Further, bruised credit can be repaired and does not carry life-long burdens for the housing market.
If you have any questions about your credit, or how to obtain a better credit score, call our team at (613) 371-8076. We’re here to help!
