Buying a house is arguably the most significant purchase of one’s lifetime. This milestone marks an exciting step towards building wealth by owning a tangible asset. However, securing a mortgage to fund such a massive investment can feel manageable.
While a hefty down payment may seem like the most significant obstacle between you and homeownership, your credit score weighs heavily in a lender’s decision. Your magical three-digit credit score reflects your overall creditworthiness. So cultivating a healthy score well before applying for a mortgage should be a top priority.
But what exactly comprises your credit score, and why does it matter so much when seeking a home loan? How can you obtain and monitor your current score? Is there a magic number that unlocks the most favorable mortgage rates? Moreover, what if your score needs a boost? Fret not; there are strategic steps you can take to level up your credit.
This comprehensive guide will explore everything you need to know to prepare your credit score for buying a house. We’ll demystify what credit scores represent, their significance in the mortgage approval process, techniques for maximizing your rating, and healthy habits for maintaining prime credit. Whether you’re new to homeownership or have mortgage experience, it pays to brush up on optimizing your credit profile when planning a property purchase.
While your score holds substantial influence, it is not the sole factor in mortgage underwriting. We’ll also discuss how lenders weigh other variables like your income, existing debts, assets, down payment amount, and property value. By cultivating an overall healthy financial foundation, you’ll impress any lender.
Let’s embark on an empowering credit cleanse together! With intelligent strategies and diligence, you can feel mortgage-ready when the right home hits the market in 2024. Be proactive by starting to improve your credit health today. Then watch your dreams of owning your piece of Canada unfold!
What is a Credit Score and Why it’s Important for Buying a Home
For most people, buying a home is the most significant financial milestone and investment they will make. However, achieving the dream of homeownership is a challenging feat, especially when it comes to securing financing through a mortgage lender.
While having enough savings for a down payment is one major hurdle, your credit score is another crucial factor in determining if and how you can qualify for a competitive mortgage loan. Therefore, monitoring and maximizing your credit score well is wise before embarking on your home-buying journey.
But what exactly is your credit score, and why does this three-digit number influence your financial life? Let’s peel back the layers to demystify credit scores and reports.
Defining Credit Scores, Reports, and Credit Bureaus
Your credit score is a numeric rating, typically between 300 and 900, intended to convey your creditworthiness and risk level to potential lenders. This influential number is calculated based on the details in your credit report, an extensive profile compiled by credit bureaus that documents your current and historical borrowing relationships.
Credit reports contain in-depth information reported by your lenders and creditors about your credit accounts, payment history, amounts owed, credit history length, recent inquiries, and other relevant financial behaviors. This profile lets lenders look beyond a score and evaluate your behaviors firsthand.
In Canada, the two authoritative credit bureaus that produce consumer credit reports and corresponding credit scores are Equifax and TransUnion. These companies collect information from banks, mortgage lenders, credit card issuers, auto financers, utilities, telecoms, and other creditors to build your unique credit history and profile.
The credit bureaus use complex, proprietary scoring models and algorithms to crunch the data from your various accounts and payments into those critical three-digit credit scores lenders rely heavily on when underwriting loans.
So, in summary, your credit score stems from the comprehensive intel compiled in your credit reports by Equifax and TransUnion based on your credit history and behaviors reported by creditors.
The Vital Role of Credit Scores in Mortgage Approval
When you apply for a mortgage to finance your home purchase, lenders will place tremendous weight on your credit score in initially deciding whether you qualify. They also heavily factor in your score when determining the loan terms and interest rate they will offer if you are approved.
Generally, the higher your credit score, the better your chances of being offered a mortgage loan with favorable interest rates reflecting your lower risk level as a borrower. Those with excellent, long-established credit are rewarded with better loan offers. In contrast, those with poor or limited credit history often face rejection or pay more interest costs to offset the lender’s higher perceived risk.
Rather than tediously parsing through your entire credit history, lenders use your simplified credit score to gauge your financial behaviors and reliability. Qualifying for a mortgage ultimately depends on convincing the lender you represent a low default risk and will repay your loan responsibly. An exceptional credit score goes a long way in providing that assurance quickly.
Minimum Credit Score Requirements
Every lender will have their credit score thresholds for mortgage approval, but you can expect the following general guidelines based on mortgage type:
- Insured High-Ratio Mortgages: For high-ratio mortgages with less than 20% down payment, a minimum credit score of around 600 is often required since this financing option requires mortgage default insurance. The additional insurance minimizes the lender’s risk enough that they may approve scores starting in the excellent range.
- Conventional Mortgages: If you put down 20% or more, lenders tend to look for a minimum score of around 660 to qualify for a conventional uninsured mortgage, indicating good credit. With a sizable down payment, they may be willing to accept this slightly higher risk profile.
- Alternative Subprime Lenders: If your credit score is below 600, your options may be limited to alternative or private lenders specializing in high-risk borrowers but charging much higher interest rates and fees. A deep-down payment offsetting risk may be required.
While useful benchmarks, these minimums can vary based on your precise income, assets, debts, down payment, and the particular lender’s thresholds. Checking with brokers or advisors can provide greater insight into your situation.
The Many Benefits of Excellent Credit
Beyond simply boosting your odds of mortgage approval, having tip-top credit unlocks additional perks when financing your home purchase, including:
- Smoother Approval Process: With exceptional credit, the underwriting process may entail less paperwork, fewer questions, and an easier path to pre-approval, saving you headaches.
- More comprehensive Lender Selection: When your score proves you are a low-risk borrower, more lenders will compete for your business and provide pre-approvals.
- Lower Interest Rates: The very best rates go to borrowers with pristine credit, potentially saving tens of thousands over the mortgage lifetime.
- Lower Lender Fees: Prime lenders offer lower fees than subprime mortgages geared to higher-risk applicants with poorer credit.
- Lower Down Payment Needs – Solid credit may qualify you for mortgage insurance to put down less than 20% without punitive rates.
In short, good credit unlocks the most affordable path to homeownership, while poor credit results in major obstacles and higher costs.
The Cost of Weak Credit When Seeking a Mortgage
- On the flip side, the drawbacks of having a low credit score when applying for a mortgage to finance your home purchase include:
- Higher Risk of Denial: Weak credit scores often result in outright loan denial, shutting down your home-buying plans.
- Higher Interest Rates – Applicants with poor credit pay higher interest costs over the life of the mortgage loan to compensate for risk.
- More extensive Down Payment Needs: Weak credit means putting more skin in the game up front to offset your risk profile for lenders.
- Resorting to Subprime Lenders: Poor credit may rule out prime mortgage lenders, leaving you with less favorable subprime sources.
- Hefty Lender Fees: Subprime lenders charge steep origination fees and closing costs in exchange for taking on risk.
In summary, bad credit equals a more challenging and expensive path to homeownership if you qualify.
How to Check Your Credit Score
Now that you understand your credit score’s integral role in securing favorable mortgage financing, learning to access and monitor your score quickly is crucial. Knowing your current rating and how it trends over time is power.
With some simple steps, you can obtain your credit scores from authoritative sources and keep your finger on the pulse of your credit health as you build towards mortgage qualification.
Various Options for Checking Your Credit Score
There are several straightforward ways that Canadians can obtain their credit scores on demand:
Directly from Equifax and TransUnion – As the two major consumer credit bureaus, you can request your scores and complete reports from their websites.
Through Financial Institutions – Many banks and credit card issuers allow account holders to view their free credit score through online/mobile banking.
Third-Party Credit Monitoring: Various apps and services provide free credit tracking and scores as a value-add.
No matter how you access it, knowing your latest credit score is essential for mortgage preparedness. Checking it regularly allows you to gauge improvement.
Tapping into Free Credit Reports from The Bureaus
The most authoritative and thorough option for monitoring your credit status is to sign up for the free credit report services Equifax and TransUnion offer.
You can request credit reports from each bureau as the two definitive sources. They are required by law to provide every Canadian with one free report per year. These services also update your credit scores monthly so you can track changes.
You can sign up to access your free reports and monitoring on the Equifax and TransUnion websites. Create your online account with each bureau individually to check both reports. The bureaus also offer mobile apps to track your profile on the go.
This direct access to your reports from the source allows you to analyze the comprehensive credit details being reported and ensure everything is accurate.
Checking Your Score through Financial Institutions
In addition to getting your reports from the bureaus, many banks and credit card issuers today offer account holders the ability to view their free credit score through online or mobile banking. Most institutions provide free credit score monitoring as a courtesy to clients.
Log into your online banking portal, open your institution’s mobile app, and navigate to the credit score section. The score displayed is often updated monthly, providing a snapshot of your current rating that you can compare over time.
Just be aware the score shown may differ slightly from the score the bureaus calculate, as institutions may use their formulas. But it still provides a ballpark idea of where your credit stands.
Resolving Errors to Improve Credit Report Accuracy
Each time you check your credit reports from Equifax and TransUnion, you must carefully review all the details reported for potential errors. Incorrect or outdated information can unfairly drag down your credit score.
If you notice any mistakes in your credit reports, such as accounts that aren’t yours or incorrect balances or payment statuses, dispute them through the proper bureau channels. Getting errors corrected ensures your credit score accurately reflects your financial behaviors.
The frequency with which you monitor your credit reports makes a difference. Checking them regularly and catching issues early prevents mistakes from unjustly jeopardizing your mortgage loan eligibility.
What is Considered a Good Credit Score for a Mortgage
When you set your sights on buying a home, one of the first questions that understandably comes to mind is, “How high does my credit score need to be to qualify for a mortgage?”
While every lender has their thresholds, there are general credit score guidelines you can use to evaluate if yours falls into a “good” credit tier—and steps to take if your score has room for improvement.
The Range of Credit Scores and Their Meanings
First, it helps to understand the possible range of credit scores and the broad categories. In Canada, scores are given in a range from 300 to 900. The score bands indicating your credit tier are:
- 800-850 = Excellent credit
- 750-799 = Very good credit
- 700-749 = Good credit
- 650-699 = Fair credit
- 600-649 = Poor credit
Generally, you want your score to fall in the good to excellent range to qualify for preferred mortgage rates and terms from prime lenders. Fair or poor scores often mean higher rates or needing a subprime lender.
While knowing the score tiers is helpful context, the best benchmarks come from understanding lenders’ typical minimums for approval.
Minimum Scores Needed for Different Mortgage Types
The minimum credit score you’ll need for a mortgage pre-approval can vary slightly depending on the mortgage type pursued:
Insured High Ratio Mortgages: If your down payment is under 20% of the purchase price, you’ll need mortgage default insurance. Lenders often look for minimum scores of around 600 for these high-ratio-insured mortgages. With insurance protecting them, they may approve borrowers with excellent credit.
Conventional Uninsured Mortgages: You won’t need mortgage insurance if your down payment is 20% or more. For conventional uninsured mortgages, minimum scores are often around 660+ in the excellent credit tier. Without insurance, lenders want reassurance you can repay.
Alternative Subprime Lenders: Borrowers with credit scores below 600 may need to use a specialized subprime lender that finances higher-risk applicants. But interest rates and fees are typically much less favorable.
Shoot for the highest score within reach to maximize your mortgage financing options.
Ideal Credit Score Range for the Very Best Mortgage Rates
While those minimums help you qualify, you’ll typically need to reach higher score thresholds to access the rock-bottom interest rates and ideal loan terms.
To be offered the very lowest published rates from prime lenders, your credit score should fall in the very good to excellent range of 720 and higher.
The higher your score, the better the rates and terms you can expect to qualify for, ultimately saving you substantially over the lifetime of your mortgage loan. Good may qualify you, but excellent scores get the most competitive deals.
Other Factors Beyond Your Credit Score Also Hold Weight
It’s important to remember your credit score alone does not seal your mortgage approval fate. Lenders also carefully scrutinize and weigh several other aspects of your financial profile when underwriting home loans, including:
- Your income and employment history
- Existing debts and liabilities
- Assets and down payment funds
- The value and condition of the property
- Your total debt-to-income ratio
The goal is to craft a well-rounded financial picture that presents you as an ultra-low-risk borrower on paper. In addition to optimizing your credit score, strengthening these ancillary facets of your financial foundation can enhance your mortgage eligibility and terms.
A stellar credit score opens doors, but pairing it with an otherwise healthy financial profile makes your loan approval a no-brainer for lenders.
How to Improve Your Credit Score
If your current credit score falls short of an ideal mortgage-ready range, do not worry. With some strategic planning and diligent execution, you can take tangible steps to level your rating over time.
Here are tips and techniques for boosting your credit score to maximize your chances of mortgage approval with top-tier interest rates:
Religiously Pay All Bills On Time
One of the most pivotal factors that make up your credit score is your track record of on-time payments and a history of late payments. This payment history category accounts for a hefty 35% weighting towards your overall score.
Even one late payment that gets reported on a credit account can cause your score to plunge. Conversely, a long-spanning track record of on-time payments plays a massive role in propelling your score into a lender-friendly credit tier.
Therefore, ensure you get all payment due dates on credit accounts, loans, or monthly bills. Set up autopay and automated reminders through calendar alerts or apps to guarantee your payments are submitted on or before deadlines each billing cycle.
If you submit a late payment by accident, quickly contact the creditor or lender and politely ask if they would be willing to revoke the late fee or delinquency mark as a one-time courtesy. With patience and courtesy, you may get lucky and have them reverse the negative credit impact. But late payments should be an absolute last resort scenario through proper planning.
By cementing a lengthy consistent history of on-time payments, you demonstrate low credit risk and responsibility to lenders reviewing your mortgage application.
Aggressively Pay Down Revolving Credit Card Balances
In addition to your payment timeliness, your credit utilization ratio heavily influences your score, accounting for 30% of your rating factors. This ratio compares your current outstanding balances against your available credit limits on revolving credit lines like credit cards, lines of credit, and overdraft accounts.
As a general rule of thumb, you want to maintain a utilization ratio below 30% across all accounts for ideal credit bolstering. This means keeping your balances at no more than 30% of your total available credit limit at any given time.
For example, if you have a credit card with a $1000 limit, you’ll want to keep your balance below $300 on that particular card. Paying down balances to stay under 30% utilization on all credit lines demonstrates responsible usage and creditworthiness to prospective lenders.
Striving to pay your cards down to low balances or clear them out entirely each billing cycle is even better for maximizing your score. Every extra dollar paid towards your revolving balances means continuing to lower that all-important utilization metric.
Minimize Credit Inquiries When Mortgage Rate Shopping
Your credit score also takes into account new credit inquiries initiated by you as well as by lenders. Applying for too many new credit accounts or loans within a short window of time can cause harm to your score.
Each application triggers a hard inquiry on your credit file, equating to 3-5 point dings per inquiry. Too many inquiries give the impression you are credit hungry or shopping around out of financial desperation, significantly dragging down your score.
Therefore, be highly selective and apply only to the credit accounts you need. Only apply for financing if you have a confirmed need. Avoid applying for multiple credit cards at once.
When it comes to mortgage shopping, limit hard inquiries by only applying with a lender once pre-approved. You can shop and compare loan rates across multiple lenders using pre-approvals without incurring additional hard credit hits.
Seek Higher Credit Limits on Accounts with Good Standing
Seeking to increase your credit limit on longstanding accounts in good standing can also help strengthen your credit profile quickly. The higher your overall available revolving credit limit across all your accounts, the lower your utilization levels can be kept.
Say you have a credit card with a $1000 limit that you have used responsibly with perfect on-time payments over the years. Given your history of responsible usage, you could call the card issuer and ask them to review your account for a credit limit increase.
If approved for a higher limit – say $2000 – while keeping your spending the same, your utilization ratio on that card would automatically decrease, boosting your score. Accepting pre-approved credit limit increase offers from issuers can have the same effect.
The key is keeping your balances low and your unused credit limit high. More available credit with responsible use means lower utilization levels contributing to your score.
Correct Any Credit Report Errors Dragging Down Your Score
Given lenders’ heavy dependence on your credit score, your credit reports must contain 100% accurate information about your accounts and payment behaviors.
Even minor errors in your Equifax and TransUnion reports, such as incorrect balances, mistaken late payments, or accounts that do not belong to you, can significantly drag down your score. That’s why frequent credit report monitoring and review is so important.
If you notice any discrepancies on your credit reports that may be unjustly depressing your score, you must dispute them immediately through the proper credit bureau channels. By law, the bureaus must investigate disputes and remove any inaccurate information.
Proactively fixing mistakes on your credit reports ensures the credit score lenders evaluate paints an accurate picture of your financial responsibility. Keeping your reports error-free is as pivotal as good financial behaviors when vying for mortgage approval.
Open a Credit Builder Account or Secured Card
If you are starting and want to build credit from scratch, opening a credit builder loan or secured credit card can help establish initial positive history.
With credit builder loans, you make monthly fixed payments into a locked savings account. The payments get reported to help build a payment history. Once you complete the term, you receive the savings accumulated.
Secured cards require an upfront security deposit that becomes your credit limit. They allow you to build a payment history like a regular card if you pay on time. After one year of good standing, you may qualify to graduate with an unsecured regular credit card.
Get Added as an Authorized User on Old Accounts
Ask a trustworthy family member or partner with longstanding credit accounts in flawless standing to add you as an authorized user on their credit card or loan account. Their positive long history will get tied to your credit profile and help strengthen your score.
Just be mindful that you also inherit the activity on the account, so avoid getting linked to accounts demonstrating poor financial management. Make sure payments continue to be made on time once you’re added.
Sign Up for Free Credit Report Monitoring
Lastly, sign up for free credit monitoring services to check your Equifax and TransUnion reports frequently, at least monthly. Carefully reviewing your complete reports allows you to rapidly dispute and correct any inaccuracies before adversely impacting your mortgage rate eligibility.
Monitoring your score routinely also lets you verify that positive efforts like lowering utilization and fixing errors translate into score improvements over time. Visibility into the factors influencing your score is power when strategizing improvements.
Maintaining Good Credit Habits
Now that you’ve worked hard to build and maximize your credit score, it’s essential to cement positive financial habits that maintain your rating long-term.
Sustaining excellent credit health through smart everyday habits ensures your score stays mortgage-ready when your home-buying moment arrives.
Make All Credit Payments On Time, Every Time
One of the most influential factors in calculating your credit score is your long-term track record of making timely payments every month. This payment history category accounts for 35% of your overall score.
Therefore, you must establish and remember to take advantage of credit account payment deadlines. Always pay at least the minimum payment required by the monthly due date on credit cards, loans, mortgages, and other accounts.
To guarantee on-time payments, enroll in autopay through your bank or directly with creditors to have payments automatically debited each billing cycle. You can also set calendar reminders and payment alerts to stay caught up on approaching deadlines.
The longer you can sustain an unblemished track record of on-time payments month after month, year after year, the better for bolstering your credit rating and convincing lenders of your low default risk. A few late slips can seriously sink your score.
Keep Revolving Account Balances Low
In addition to timely payments, maintaining low credit utilization is vital for ongoing credit health. Keeping your balances well below 30% of the available credit limits across all revolving accounts demonstrates responsible usage that boosts your score.
For credit cards, pay off as much of the monthly balance by the due date as possible, ideally paying in full to avoid interest charges. On lines of credit or overdraft accounts, withdraw funds only when truly needed and pay down aggressively.
The lower you can maintain your utilization percentage through conscientious spending and rapid playdowns, the quicker your score climbs upwards. High utilization drags your score down, so diligent balance minimizing is crucial.
Avoid Closing Old Credit Accounts with Good Standing
When it comes to the length of your credit history, try not to close your oldest active credit accounts in good standing with no late payments. These longstanding accounts that first helped you establish credit are key.
Closing them can hurt your score since those accounts marked the beginning of your credit history. Keep them open and active through occasional, responsible use. Having continuity shows lenders your stability.
Diversify Your Credit Mix
It helps your score to have a diverse mix of credit types in your profile – including mortgages, student loans, credit cards, car loans, lines of credit, etc. Managing a variety of credit products responsibly demonstrates important creditworthiness to lenders.
Monitor Your Credit Regularly
Check your Equifax and TransUnion credit reports frequently, at least every few months. Closely reviewing your reports allows you to rapidly dispute and correct any inaccuracies before they adversely impact your score.
Monitoring also lets you verify that positive habits like lowering utilization translate into your desired score improvements. Knowledge is credit power.
Minimize New Credit Before Major Applications
In the months leading up to significant financing applications like a mortgage, be very selective about applying for any new credit. Each application triggers a hard inquiry on your report, temporarily decreasing your score by a few points.
Too many new accounts in a short span can give the impression of credit hunger. Minimizing inquiries in the months preceding a mortgage application sets you up for optimal approval odds.
Establishing and sticking to positive financial habits for the long run is the key to mortgage qualification. With diligence, your credit health can work for you rather than against you.
When to Check Your Credit Score Before Applying for a Mortgage
The timing of when you check your credit score leading up to applying for a mortgage can have significant implications on your eligibility and borrowing rates. Be strategic and proactive by monitoring your score at key moments:
Check Your Credit At Least 6 Months Before You Plan to Apply
To set yourself up for mortgage success, start monitoring your latest credit score exceptionally early in the home shopping process, ideally at least 6 months before you will officially submit a mortgage application.
Knowing your starting score with ample lead time allows you to realistically evaluate your current standing and implement credit-boosting game plans if needed before lenders scrutinize your rating. Last-minute surprises can be prevented with early visibility.
Giving yourself a 6 month window also provides enough opportunity for positive actions like paying down debts or disputing report errors to increase your score. You want the highest achievable score when loan decision time comes.
Recheck Your Credit After Any Major Applications
Be sure to verify your latest score following any significant new credit applications, account openings, credit limit increases, or other impactful changes to your credit report, such as new addresses or employment.
New activity can influence your score, for better or worse. For example, applying for an auto loan could cause your score to decrease temporarily due to the hard inquiry. Or paying down a card may increase your rating by lowering utilization. It’s important to recheck.
Verify Your Score After Taking Steps to Improve It
Routinely recheck your credit score after taking tangible actions to increase your rating, such as paying down balances, becoming an authorized user, or disputing mistaken information.
Re-evaluating your score is the only way to confirm that your credit-boosting efforts are working and translating into tangible score gains that benefit your mortgage approval odds and terms.
Sign Up for Continuous Monitoring Through a Free Service
Given how frequently your score can fluctuate, it’s wise to sign up for a free credit monitoring service that supplies routine score updates, such as monthly or even weekly.
Free services from your bank or third-party apps make keeping continuous tabs on your score accessible. Ongoing visibility enables you to rapidly address changes, maximize accuracy, and track positive trends.
One Final Check 1-2 Months Before Mortgage Pre-Approval
Lastly, once you’re nearing submitting your official mortgage application, verify your score once more 1-2 months before seeking pre-approval from lenders.
This final gut check ensures your rating is still optimized, as lenders will run your numbers rather than relying on an old score. It also allows time for any last-minute score-polishing activities.
Strategically timing your credit score reviews helps eliminate surprises, empowers improvement, and sets you up for mortgage approval success. Monitoring diligently is vital.
Role of Debt-to-Income Ratio, Downpayment, etc. in Mortgage Approval
While your credit score is certainly important, lenders conduct a deep dive into multiple other aspects of your financial situation when underwriting mortgage loans. Beyond just your credit rating, key approval factors include:
Calculating and Meeting Debt-to-Income (DTI) Ratio Guidelines
An important metric lenders calculate is your debt-to-income ratio, or DTI for short. This percentage compares your total recurring monthly debts divided by your gross monthly income from all documented sources.
Essentially, it conveys how large of a chunk your current debts consume out of your earnings each month. Conventional mortgages typically require a maximum DTI of 45% for approval. Ratios higher than 50% often result in denied applications.
The lower your DTI ratio, the more comfortable a lender will feel about your ability to manage the additional monthly mortgage payment on top of your existing obligations. Therefore, paying down high interest debts aggressively or consolidating multiple payments before applying can decrease your ratio.
Be prepared to provide recent pay stubs, bank statements, tax returns, and other documentation to prove your income sources and monthly debts. Make sure all disclosures are accurate and current. Undisclosed debts hurt, so list everything.
If your ratio exceeds limits due to circumstances like self-employment income variability, considering applying with a cosigner who complements and offsets your liabilities may help with approval odds. But strive for the lowest DTI possible.
Meeting Minimum Down Payment Requirements
The size of your down payment, or the percentage of the total home price you put down upfront in cash, greatly affects mortgage underwriting decisions. Conventional mortgage loans typically require a minimum down payment of at least 20% of the purchase price.
With less than 20% down, you will be required to pay added monthly insurance premiums through the CMHC to protect the lender against potential default risk. This insurance adds costs you want to avoid if possible through a 20% down payment.
In general, the more sizable your down payment, the less financial risk you represent to the lender. Paying a large portion upfront provides peace of mind that you have invested your own assets and have “skin in the game.” Substantial down payments also give you leverage to negotiate for better interest rates.
If gifting part of your down payment, be prepared to provide a gift letter validating where the funds came from. Lenders want to document the paper trail proving the funds are rightfully yours.
Having Funds Remaining to Cover Closing Costs
On top of your down payment, lenders want reassurance you have cash reserves remaining to cover the myriad of closing costs that come due at mortgage settlement. These one-time fees include the appraisal, legal fees, home inspection, land transfer tax, title insurance, and prepaid property taxes and insurance reserves.
Closing costs typically amount to 3-5% of the total home purchase price. Walk through each anticipated cost with your mortgage advisor and tally the total you need to have saved beyond just the down payment. Ask sellers to cover some reasonable closing costs within your offer if possible.
With both your down payment and closing costs covered, you demonstrate the assets and savings necessary to fund a smooth mortgage closing. Empty pockets make lenders nervous.
Providing Proof of Stable Employment History and Income
Given a mortgage represents a long-term loan commitment, lenders greatly emphasize reviewing your employment history and income stability before approving such a large financing obligation. They want to see reliable, steady sources of income with longevity.
Be prepared to furnish verifiable documentation like recent pay stubs, tax returns, proof of additional income like pensions or social assistance, and signed employer letters providing your length of tenure and salary details. Gaps in your employment history without explanation can raise red flags.
If your income fluctuates or derives heavily from commissions, tips or self-employment ventures, provide conservative multi-year earnings averages. Substantiating these less predictable income streams requires more paperwork but pays off.
Evaluating Your Total Assets and Overall Financial Profile
In addition to your debts and income, lenders look at your overall assets, savings, and investments to gauge your net worth and complete financial picture. Money left over after your down payment and closing costs is key.
Request copies of recent investment account and bank statements to provide a full landscape of your assets, property, and liquid savings remaining after you tap funds for the home purchase. A sizeable cushion conveys stability lenders seek.
Appraising the Value and Condition of the Property
Lenders always order a home appraisal to ensure the purchase price is in line with realistic fair market value, so the property represents a prudent investment. Major undervaluation hurts.
Home inspections also safeguard against undisclosed deficiencies or major repairs needed that you may not be financially ready to cover, which could jeopardize the loan. Choosing a home likely to appraise well demonstrates your financial judgment.
How BHM Financial Can Help Improve Your Credit Score
As the government article outlined, having a solid credit score in the good to excellent range is vital to qualifying for the best mortgage rates and terms. However, many Canadians have credit scores below 700 which can limit their home-buying options.
BHM Financial understands that your credit score only tells part of your story. We offer specialized mortgage programs that look beyond your score to account for your total financial picture. Our services include:
- Mortgages for borrowers with fair/poor credit scores as low as 500
- Low down payment mortgages, including 5% down options
- Mortgage refinancing at better rates for those with poor credit
- Customized mortgage solutions based on YOUR unique situation
- Expert advisors who help improve your credit score and mortgage eligibility
At BHM Financial, our mortgage programs are designed to help Canadians with less-than-perfect credit scores achieve homeownership. We know an outdated medical bill or student debt shouldn’t jeopardize your lifelong dream of owning a home.
That’s why we dig deeper to understand your full credit story. Our personalized action plans help you implement strategies to boost your credit score over time. Our advisors offer tips tailored to your situation to help you rebuild and strengthen your credit.
With BHM Financial’s help, a low credit score does not have to be a permanent barrier to getting a mortgage. We work closely with clients to improve their financial profile and creditworthiness. We often get you approved for a mortgage within 6-12 months through our customized game plans.
If your credit needs work, but you’re ready to buy a home now, contact BHM Financial today to start the journey. With determination and our support, homeownership can be within your reach.
Conclusion
When applying for a mortgage to finance a home purchase, having excellent credit is pivotal for gaining approval and securing the most favorable interest rates and terms. Therefore, monitoring and maximizing your credit health in advance is crucial.
Ideally, you’ll want to check your credit reports frequently for at least six months before you apply for pre-approval. This gives you ample time to address errors dragging your score down and implementing proven credit-building strategies. During this period, be diligent about paying all bills on time, keeping credit card balances low, and limiting new credit applications.
In addition to optimizing your credit score, also focus on strengthening other aspects of your financial foundation that mortgage lenders scrutinize, like your income stability, savings and assets, and debt-to-income ratio. The more areas you can shore up beyond your credit, the stronger your overall borrower profile will be.
In the months directly preceding your mortgage application, monitor your credit regularly and take any last steps to maximize your rating. Then seek guidance from a mortgage advisor on positioning yourself for the highest likelihood of approval with ideal rates for your situation. With diligence and commitment, you can feel mortgage-ready when the right home hits the market.