Tips to Help You Secure A Mortgage When Your Credit Score Is Low
So, you’re tired of renting and are ready to buy a home that you can call your own. The only thing standing in your way is your credit.
While it’s true that having bruised credit can impact your ability to buy a home, remember that credit scores aren’t permanent, and poor credit is 100% fixable.
As a prospective homebuyer, there are several steps you can take to help improve your credit score in anticipation of buying a home and securing a mortgage.
But first things first, let’s take a look at the impact that your credit can have on your ability to purchase a house.
How Bruised Credit Affects Your Ability to Buy a Home
Generally speaking, the higher your credit score, the less of a risk you pose to a lender of defaulting on your payments. This means you may be more likely to qualify for a lower mortgage rate and better terms if you have a positive credit history.
What Credit Score Is Needed to Purchase a House?
So, what is considered a high and low credit score? Here is a breakdown of different ranges and what they mean:
- 800 – 900: Excellent
- 720 – 799: Very Good
- 650 – 719: Good
- 600 – 649: Fair
- 300 – 599: Poor
It’s up to the individual lender to determine your eligibility for a mortgage based on your credit history along with other factors such as income, capital, and employment history.
Typically, people with stronger credit scores – 720 or higher – are more likely to be approved for loans with lower interest rates and more favourable terms.
However, borrowers with credit scores of 620 and up are still likely to qualify for the same best rates and terms.
How Your Credit Score Is Calculated
Several factors are taken into consideration when calculating your credit score. Here is an approximate breakdown of how much each factor is weighed.
- Payment History
Payment history is the most important factor when it comes to calculating your credit score and makes up 35% of your overall score.
- Used Credit Vs. Available Credit
How much debt you owe compared to your total available credit – also known as credit utilization – is also weighed considerably, and accounts for 30% of your credit score.
- Length of Credit History
This refers to how long your credit accounts have been open and makes up 15% of your credit score.
Credit history is calculated by taking into account how long your oldest and most recent accounts have existed.
The longer your credit history, the better, as it’s important for lenders to see that you have been able to handle credit accounts over a long period of time.
- Public Records
This refers to files with a history of bankruptcy, consumer proposal, collection issues, or other negative public records, and accounts for 10% of your credit score.
Having any of these events in your credit file can have a significant impact on your credit score.
Anytime your credit file is accessed, this request will be logged as an inquiry on your credit file accounts for 10% of your overall score.
Ways to Improve Your Credit
Because your credit score reflects your own personal credit history, you have the power to change it. However, there is no quick and easy fix.
Fortunately, with a bit of work and patience, you can build your credit up and make your goal of purchasing a house a reality.
Here are some tips to help you improve your credit score when looking to secure a mortgage in order to buy a home.
Request a Copy of Your Credit Report
Before you can even begin to start working on improving your credit, you need to know what your credit score is and see a break down of your credit history. This can be done by obtaining a copy of your credit report.
Dispute Credit Report Errors
Sometimes, mistakes can be made when calculating your credit score due to errors in your credit report. This can include:
- Mistakes regarding your personal information, such as an outdated home address, or incorrect date of birth.
- Incorrect payment information, such as payments showing up as late, when they were, in fact, paid on time.
- Negative information such as bankruptcy that remains on your credit report for longer than the maximum of seven years.
- Credit card accounts or loans obtained by someone with a similar name as yours, or by someone who has stolen your identity.
Be sure to check your credit report thoroughly to ensure accuracy. And if you do spot any errors, you can dispute them with one of the two credit bureaus.
You can dispute errors with Equifax by completing and submitting a Consumer Credit Report Update Form. With TransUnion, you must dispute errors by downloading and completing its Investigation Request Form.
But before you file any dispute, make sure to gather proper documentation that helps to support your claim and provides evidence that an error occurred. This includes:
- Financial statements
- Valid pieces of identification
Pay Down Debt
As previously mentioned, the amount of debt you owe compared to your total available credit is a significant factor when calculating your credit score. Therefore, one of the best ways to start improving your credit is to make significant strides towards paying down your debt.
Ask for A Credit Limit Increase – But Don’t Use It!
Besides just paying off a significant chunk of debt, which can take a long time, another way you can improve your credit utilization is to apply for an increase to your credit limit, but not use any of this newly available credit.
Don’t Obtain Any Additional Credit
Don’t let all the hard work you have put in to improve your credit score go to waste. When your credit score is being negatively impacted by a large amount of debt, it’s critical that you avoid obtaining any new credit and focus on paying down your existing debt.
Don’t Miss Any Payments
Late payments can stay on your credit report for seven years, and while the impact can fade over time, and positive changes can help counter the damage, having this information on your record in the first place can take a huge hit to your credit score.
To prevent missing any payments, set up automated payments through your bank to avoid forgetting to make them yourself.
Don’t Close Old Accounts
Because the length of your credit history has an influence on your credit score, it’s important not to cancel any old credit cards that are in good standing even if they are not in use.
Holding onto these credit accounts and using them every so often – but paying them off each month – will show some activity on your credit profile and help build a positive credit history.
Get A Secured Credit Card
If you have bruised credit, a secured credit card can be a great way to help build positive credit history.
A secured credit card requires you to put down a deposit – usually the same amount as your credit limit – to reduce the risk to the creditor.
If you miss payments, the creditor can take from your deposit to cover the missed payment. But if all payments are made on time, you will eventually get your deposit back.
How a Mortgage Broker Can Help
Contrary to popular belief, first-time homebuyers don’t necessarily have to postpone buying a home due to poor credit history.
With housing prices on the rise in most large Canadian cities, entering the housing market sooner rather than later is more important than ever. So, if you are struggling to boost your credit score high enough to qualify for a traditional mortgage, speak with a mortgage broker about alternative borrowing options, such as borrowing from an alternative lender or obtaining a private mortgage.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.