When purchasing a home in Canada, your financial situation is critical. You must prove that you are in a strong position to make such a large purchase. While factors such as a down payment and your monthly income play a large role, one number that is often overlooked by potential buyers, particularly first-time buyers, is your credit score.
What is your Credit Score Number?
Your credit score is a three-digit number that ranges between 300 to 900. It is an accumulation of your financial health and gives lenders a glimpse into your financial habits. To receive your score, several factors are taken into consideration. A few factors include:
Paying your bills on time each month
The amount of debt you have
Your open lines of credit
Your current balances on your credit lines
The different types of credit you have
The number of inquiries into your credit score
Why is my Credit Score important when applying for a Mortgage?
Lenders look closely at this number as it helps them determine how much of a risk you are when borrowing large sums of money. In Canada, you need a minimum score of 600 to qualify for a home loan from one of the big banks. If your credit score is less than 600, you will likely not be approved until you can increase your score.
If you have a low credit score and near the 600 cut off, it tells lenders you have made poor financial decisions and your financial health is not very strong. You are at a much higher risk of skipping payments on your home.
If your score is high, lenders are more confident when approving your mortgage and providing the financing you need to purchase your dream house.
How does my Credit Score affect Buying a House?
Not only will your credit score affect whether lenders will approve you for a home loan, but it will also affect your interest rate. If you are approved for a mortgage, your credit number will affect the interest rate you will be given. Even a 0.5% difference in rates can cost you thousands of dollars over the course of your loan.
For example, if you are considering a home loan for $600,000 with a 30-year term length and a 3.8% interest rate, you will pay roughly $406,400 in interest over the 30 years. If your interest rate is raised to 4.2%, you will pay approximately $456,000 over the 30 years in interest. This is a difference of $50,000 for just a 0.5% difference in rates.
How can I Improve my Credit Score?
If your credit score is low, do not give up. There are several things you can do to improve your score. A few ideas include:
Focus on paying off all debt, particularly consumer debt.
Do not apply for additional lines of credit.
Keep all current credit lines open. Do not cancel credit cards even if you do not use them.
Pay all bills on time. If you struggle to make monthly payments, sign up for automatic payments. Some companies will move your deadlines so all of your due dates are on the same day of each month.
Strive to keep all credit card balances low. If you must carry over a balance, aim to keep it 30% or less than your credit limit.
By having your financial situation under control, the home-buying process will be more enjoyable and a little less hectic.