How Your Credit Score Affects Your Mortgage Rate
Buying a home is most likely the largest purchase you’ll ever make and as a result, one of the most important decisions you’ll make too! Whether you’re ready to take the leap into homeownership or you’re still doing your research to understand if owning a home is the right fit for you, taking the initiative to plan for your future is what counts most!
If you do nothing else today, check your credit score! When it comes to getting the best possible mortgage rates, your credit score is quite important. But how much do you know about yours?
What Is A Credit Score?
To put it simply, your credit score is a three digital number that’s calculated by the credit bureaus in Canada (Equifax® and TransUnion®). This score ranges from 300 – 900 and is an indication of how creditworthy you are, or basically, how likely it is that you’ll be able to pay banks and other financial institutions back.
Your credit score takes these six factors into account:
1. Credit inquiries 10%
2. Credit history 15%
3. Credit utilization 30%
4. Payment history 35%
5. Credit mix 10%
6. And takes into account any instance of being sent to collections or filing for bankruptcy
Why Does It Matter When I’m Shopping For A Mortgage?
In the eyes of banks and financial lenders, your credit score is what makes you creditworthy. Essentially, the higher your score, the better rates you’ll receive and the more you’ll save on interest on your mortgage payments. Don’t be fooled, the internet rate you receive on your mortgage matters! Even a slightly lower interest rate could have a big impact on how much you pay in interest.
What’s The Ideal Credit Score?
Here’s a brief overview of how mortgage brokers evaluate credit scores so you can determine where you fit in currently:
- 741 or more: Wow – your credit score is excellent! This is where the best mortgage rates live.
- 713 to 740: You have a good credit score. You should receive a very good interest rate on your mortgage and have plenty of options.
- 660 to 712: This is considered a fair credit score by lenders. However, once you get to 660, you’ll be entering average credit score territory.
- 575 to 659: In the eyes of banks and lenders, this is a below-average credit score. If your credit score is below 640, you might have trouble getting a conventional mortgage from a bank or online lender. Consider working on improving your credit score to access better options.
- 300 to 574: Your credit score is poor and needs improvement but that’s OK. As your credit stands right now, you’d be considered a high-risk borrower and if you’re approved, you might end up paying a lot in interest. Luckily, you have what it takes to improve your credit score and access better mortgage rates!
Keep in mind that for every 20-point increment your credit score drops, you’re likely to see small changes in the interest rate you’re offered. Lenders typically adjust the rate they offer each time your credit score moves up or down by 20 points.
How Do I Improve My Credit Score?
If you’re feeling a bit unsure after seeing the breakdown above, you’re not alone. It’s OK to have a credit score that needs improving because there are plenty of ways to increase it:
1. The first step is to check your credit score and monitor it regularly. The more you get used to seeing it with your own eyes, the more likely you are to be motivated to change it.
2. Keep an eye on your credit utilization. Sometimes we run up the balances on our credit cards not worrying about the ramifications because we’re staying within our credit limit. Credit utilization (which accounts for 30% of your score) is the ratio of your credit card balance to your credit limit. For example, if you have a combined credit limit of $10,000, try to keep your balance under $3,000 to achieve the best score you can.
3. Always pay your bills on time! If you tend to forget, set up pre-authorized payments to make sure nothing slips through the cracks, especially the ones that report to the credit bureaus often (student loans, auto loans, mortgages and credit cards). Paying your bills on time accounts for 35% of your credit score! Once you know what your current credit score is, what it needs to be and what you have to do to improve it, you should be well on your way to getting the best mortgage rates. Understanding the process and next steps can make a big difference in how you approach buying a home.