Buying a home today is much different than it was decades ago. If you’re like most Canadians, you’re going to need a mortgage. You will have to pass some tests prospective lenders will put you through and one of those is checking your credit score.
The prices of homes have continued to escalate over the last 10 years, especially. In fact, the price of an average single family home in Canada today hovers around $504,000. You will have to save a minimum of 5% as a downpayment on a Canada Mortgage and Housing Corporation (CMHC) insured mortgage.
Despite the hurdles, most Canadians have a goal of owning their own homes. They’re striving to save enough for a downpayment and working toward passing the financial tests.
It can be much more difficult to secure a mortgage than it can other types of loans, so having some idea of the process might be helpful to you. Here are some things of which you should be mindful when you need a mortgage:
You need to have an established credit history
If your first foray into the world of credit is wanting to buy a house, you might be in for a wake up call. If you have just started to use credit — like credit cards — lenders won’t have a history to go to. You will need to wait and establish that history.
Use your credit wisely and it will pay off in the long run. A long and healthy credit history tells lenders you’re a good risk for handling mortgage payments. Having your credit built up is one of the indicators that you will be able to secure a mortgage at an attractive and an affordable rate.
Have a good credit mix on your credit report
Lenders want to see that you can manage various credit products like credit cards, loans, and a line of credit. If your credit is less than perfect, there are ways you could change that. You might want to investigate getting a secured line of credit or a secured credit card or look into programs that can help you to build your credit.
Credit utilization ratio
This is the total amount of credit you actually have to use versus how much you’ve actually used. Lenders would like to see that at around 30% or less. The more that percentage is under 30, the better chance you’ll have of being approved for a mortgage. Maxed out credit cards don’t look good on a credit report.
Your debt to income ratio
What you take home from your pay each month versus what you pay against your debt is known as your debt to income ratio. For example, if your take home pay is $6,000 each month and the minimum payments for all your debt every month is $3,000, your debt to income ratio is 50%. Getting that number as low as possible will show the lender you’ll be able to handle your mortgage payments.
Keep inquiries on your credit report down
If you apply for credit cards, loans and other credit products all at once in a short time span, lenders will be able to see that on your credit report. It may make them think you’re in desperate need of some cash. These inquiries also lower your credit score. You don’t want lenders to view you as a big risk.
Aim for a high credit score
For lenders to even consider you for a mortgage, your credit score should be at least 630. The higher your score, the better chance you have of getting a mortgage with an attractive interest rate and terms. Do everything you can to bring your score up.
Be able to prove where the down payment is coming from
If you haven’t had the downpayment saved for more than three months, you need to be able to prove where the funds came from. Lenders want to make sure you’re not borrowing the money for your down payment. If you have been working to save your down payment on your own, they want to see proof of that. If the down payment was a gift from a family member, it must be accompanied by a gift letter signed by them saying you will not have to pay that money back.
Steady and decent source of income
A lender will want to know that you have the income to be able to make your mortgage payments and that you’ve been at your job for some time. If you’re self-employed they will want to see bank statements.
A credit report without negatives
Lenders do not want to see things like bankruptcies or consumer proposals on your credit report. They also don’t want to see late payments, missed payments or payments that didn’t meet the minimum. These things will make getting mortgage approval more difficult.