Much like
your income and down payment, your individual credit score is a major financial
component of qualifying for a mortgage when looking to buy a home.
Your credit
score will be one of the main criteria lenders will examine when applying for a
mortgage, so it’s important to ensure your score is in good standing before
embarking on the home purchase process. But what exactly is a credit score, and
what sets a good score apart from a bad one?
Frances Hinojosa,
CEO, co-founder, and principal mortgage broker at Tribe Financial Group, explains
what you should know about credit scores and what factors influence them.
What is a
credit score, and why is it important?
In simple
terms, a credit score is an evaluation of how you maintain and utilize credit, such
as credit cards, loans, mortgages, and other credit facilities.
Hinojosa
says many people don’t realize their credit score is one of the biggest
indicators when it comes to the mortgage qualification process, and could
impact the interest rate you receive for your mortgage.
“That’s one
of the very first things a bank or a mortgage broker would consider or would
look at,” she explains. “It’s equally as important as your income or affordability
of paying a mortgage.”
Hinojosa
says many mortgage products are credit score-driven, meaning your credit score
will determine what interest rates may be made available to you, as well as
your ability to qualify for certain mortgage products and types.
A score of
680 and above is the sweet spot that’ll give you access to most products-anything
less that this might limit your options. If you have a score of 600 or less,
you may be looking at higher risk-based on your mortgage and interest rate
offerings.
Your credit
score is determined by a number of factors, such as your credit payment
history, the amount of credit you have available, and how long you’ve had it
for. Having a healthy credit score demonstrates to a lender you can meet your
payment commitments over time.
“It shows the
consumer is responsible and has a track record of owning up to their
obligations and paying as agreed,” said Hinojosa. “That also plays into
risk-based pricing on the actual mortgages, as well.”
What
factors determine my credit score?
There are a handful
of indicators that pay a role in shaping your credit score, according to Hinojosa.
One of the
most influential factors is your payment history, which includes making sure
you pay your debts on time. Thirty-five per cent of your credit score is based
on payment history. If you can’t pay off your credit in full, Hinojosa
recommends making at least the minimum payment by the due date to keep your
score in good shape. Having a public record of being in collections or bankruptcy
may also impact your credit score.
Another
factor is how you use your credit. You’ll want to avoid charging up to the
maximum amount or upper limits of your credit card. Hinojosa suggests keeping
your credit charges to around 30% of your limit each month. Thirdly, your
credit score is influenced by how much credit you have available. Occasionally,
Hinojosa sees consumers that don’t have any credit, or those that believe using
credit is a bad thing. However, having a history of varied credit use, such as
a couple of credit cards and a car loan, proves you have a history of making
payments.
How long you’ve
had access to credit is also important, as the more time you’ve had credit
history, the better. Hinojosa compared this to car insurance.
“Usually
when you’re a new driver, it’s a bit more expensive. Whereas if you have a good
driving history, the longer the good driving history, the lower your insurance
premium,” she explained. “It’s very much the same when it comes to credit. The
longer you show a history of repeating good credit, the better it will be for
your credit score.”
Finally,
making an inquiry on your credit accounts for 10% of your overall score. Some
consumers tend to get concerned when they’re shopping for a mortgage that they’re
going to take a hit on their credit score, but Hinojosa says consumers shouldn’t
be overly concerned if a lender is making an inquiry as part of the mortgage
process. On the other hand, Hinojosa says you may not want to apply for many
types of credit all at once, as this will result in multiple back-to-back
inquiries.
“If you already
have excellent credit, let’s say 720, [at] 10% of that, it’s only going to
impact your score by seven points,” she said. It’s not going to put you from an
excellent category to a bad category. It’s probably the least of the indicators
to worry about in the overall impact of your credit score.”
How can I
improve my credit score?
If you’re
planning to buy a home in the future, but aren’t sure how your credit score
stacks up, Hinojosa says making inquiries in advance with a mortgage
professional can be helpful to find solutions for tweaking your credit score.
It can take
time to improve your credit. Hinojosa explains credit is reported on a
month-by-month basis, so it may take a few cycles or more to get your score where
you want it to be. In cases where a home buyer needs to secure a mortgage
quickly with their current credit score, Hinojosa says a mortgage professional
can explore different options.
“In some
cases if they have to purchase right away or they need to do a mortgage
transaction right away- I like to call it stepping stones – they may have to
look at an alternative type of lender which might come with a slightly higher
interest rate,” said Hinojosa. “However, it’s still affordable with your cash
flow and it’s just a stepping stone that will get you in a year or two over to
a traditional bank.”
The article
above is for information purposes and is not legal or financial advice or a
substitute for legal counsel.
Source By: CREA