Credit score, First-Time Home Buyers, Market, Mortgage Rate
“It takes credit to build credit” – a saying most of us have heard in our lifetime. It may have been what prompted you to get your first credit card. For those with good cash-only spending habits, it can be hard to understand why a declined loan application is due to a lack of built credit. The problem affecting so many is that access to certain types of credit can be too easy and this “easy access” credit has the ability to destroy your credit score if not monitored and kept in balance.
So, what exactly is “credit” when it comes to finances and how does your credit score affect your mortgage interest rate?
Credit is a numbering system called a Fico score (also known as a Beacon score) that gauges how likely you are to repay borrowed money. The higher your score, the ‘safer’ you seem to lenders and the lower your score, the ‘riskier’ you are.
One of the first steps to building your credit is to obtain a credit card. Credit cards typically carry a high interest rate and risks if you do not understand the importance of responsible credit card use, which involves monthly payments and keeping a low balance. However, if you are responsible, this demonstrates to the lender that you will likely repay your debts and repaying your debts increases your credit score.
In Canada, a credit score ranges from 300 to 900. A higher score is always desirable, but anything over 800 is ‘excellent’ and scores between 720 and 799 are considered ‘very good.’ A score between 640 and 719 is considered ‘good’ and between 580 and 639 is considered ‘fair.’ Anything below 579 is considered ‘poor,’ meaning you may have a more challenging time getting lenders to loan you money.
A credit score is determined by multiple factors: payment history, used vs available credit, credit history, public record, and inquiries.
These factors are weighted at different amounts, with payment history usually carrying the most weight and the number of hard credit inquiries carrying the least weight.
A credit score is determined by multiple factors: payment history, used vs available credit, credit history, public record, and inquiries.
These factors are weighted at different amounts, with payment history usually carrying the most weight and the number of hard credit inquiries carrying the least weight.
Yes, it absolutely affects your mortgage interest rate. The higher your score, the lower the interest rate you will usually get. If your score is lower, not only will you face higher interest rates, but you may have a hard time finding a lender to take you on as a risk.
As your credit score drops, so does your access to better interest rates. In the past, a score above 680 was the minimum credit score requirement; Canada Mortgage and Housing Corp. (CMHC) dropped the minimum credit score requirement from 680 to 600 as of July 5, 2021. While this is good news for those who may be rehabilitating their credit score or just starting to build credit, it doesn’t guarantee they will have access to the best mortgage rates. Most banks will typically not look at a credit score under 650.
If you have a credit score of 600 or less, your choices become limited to B Lenders and private mortgage lenders. Many private lenders will charge an interest rate significantly higher than the prime or non-prime rates. These lenders may also tack on extra fees due to the borrower having poor credit as it gives them a form of insurance in the instance that a loan is defaulted on.
If you are considering buying a house soon, it may be a good idea to track your credit score and work towards obtaining a higher Fico score.
Whether you are purchasing, renewing or refinancing your mortgage, come work with a qualified and knowledgeable broker to have an enjoyable and stress-free mortgage experience.
Tara Sales - Mortgage West The Right Advice at the Right Time
