While everyone’s financial situation varies, one thing that remains the same is that everyone has a financial finger print known as their credit score. Your credit score is a number on a spectrum that indicates your capability to repay a loan. This number is what lenders use to evaluate not only if you qualify for a loan, but also in terms of the amount they will loan you and the interest rate which you’re given.
How It Affects Your Mortgage Rate
Essentially, the higher your credit score is, the more desirable of a candidate you are to a lender. Thus, the lower, or poorer, your score is, the more of a risk you are. Typically, a credit score of 680 or higher will get you into the best possible interest rate tier. While the average score in Canada is 650, experts say a score lower than 620 can make it extremely difficult to qualify for a mortgage. So you can see, there isn’t much wiggle room when it comes to the numbers. The interesting, and often most overlooked aspect is that the difference between the best interest rate and the worst interest rate tiers can be anywhere from 1%-1.5%, which doesn’t seem like much of a difference. However, let’s take a look at the difference it would make in your payments.
Hypothetically, let’s say you took out a mortgage for $200,000. At 4% interest, your monthly principal plus interest payment would come out to $954.83. However, just one percentage point different, at 5%, would make that total $1,073.64 a month. That would mean that over a 10 year period you would be paying a difference of nearly $15,000. So you can see, a minor variation in your credit score can turn into a major difference in long term costs.
What Lenders Are Looking For
Besides the obvious factor of income, lenders do take into consideration a few other variables when looking into your credit score before qualifying you for a mortgage. First off, they are looking to make sure you’ve had a long-term history of on-time payments, low balances and haven’t had any run-ins with any creditors.
More specifically, your lender will want to check into any outstanding debt you may have and what it is from. For example, student loans are more preferable to see on a credit history than several maxed out credit cards. Next, they will want to know how that amount is relative to your total available debt. Lastly they will want to look into the length of your credit history, a good score that’s only 1 year old may hold up worse than a poor score that’s a decade old, and if you’re on the pursuit for new credit, such as a mortgage loan – All of these factors come together to paint a sort of financial mosaic of where your credit stands and how much of a risk you’d be to a lender.
What You Can Do To Help
Rest assured, there are some ways you can prevent credit score turmoil. Besides the obvious of keeping your credit balances low and making payments on time, it’s suggested that you start to clean up your credit about a year before you look into getting a mortgage. This 12-month period will give you enough time to sort out any hiccups, clean up any pesky balances hanging over your head, as well as give you a one year block of good credit history, which can immensely work in your favour. Another way to get a head start on applying for a mortgage is to avoid applying for any new credit. Things such as car loans, and even new credit cards should be avoided and kept off your credit record until after you’ve established your credit score and settled on a mortgage rate and terms. Not only can they look bad to a potential lender, they can also drag you in over your head with financial responsibilities when added in with monthly mortgage payments.
If you have any questions or concerns about how your credit score may be affecting your mortgage rate, feel free to give me a call at 705-315-0516. I am always happy to help you better understand your financial options to find a mortgage that works for you.