Relationship between Mortgage Loans and Credit Scores
Securing a mortgage loan is an essential step to purchasing a home, especially if it's your first home. If you're employed and aren't in obscene amounts of debt, you'll likely be approved for a mortgage loan. However, the interest rate on that loan is influenced by several factors. This includes the size of your down payment—the duration of your loan, and the location of your home.
Your credit score is perhaps the most relevant factor in determining your interest rate. To help you get the best mortgage loan possible, we'll discuss credit scores and what steps you can take to raise your score. Why accept the first loan offered to you when you can acquire a more affordable one in just a month or two?
What Is a Credit Score?
A credit score is a 3-digit number between 300 and 900. This score represents how likely a credit bureau thinks you are to pay your bills and debts on time. A credit bureau wants to feel confident and secure in lending people money. Therefore, they won't lend large amounts to someone they deem financially irresponsible. Alternatively, if you have a good credit history that credit bureaus can feel confident about, you may gain access to more competitive interest rates.
You can view your credit score on your credit report, which you can typically access from your banking app. You can also request a credit report from one of Canada's two main credit bureaus, Equifax or TransUnion. Your credit report comprises data from public records and information sent to them by lenders. This information includes anything relevant to your credit history that may influence your credit scores, such as missed payments and the amount you owe to creditors.
What Is a Good Credit Score?
As stated above, your credit score will be somewhere between 300 and 900. In Canada, Equifax deems a good credit score to be somewhere between 670 and 739. A score between 740 and 799 is considered very good, and 800 and above is deemed to be excellent.
So, what is a bad credit score? Having a credit score below 660, the low end of good doesn't necessarily mean you have a bad score. A score between 600 and 660 is generally considered fair, though you'd want to increase it for a reasonable interest rate on your mortgage loan. A credit score isn't usually regarded as bad unless it's under 600.
What Is the Minimum Credit Score for a Mortgage Loan?
To apply for the best mortgage rates, you'll need a credit score of at least 680. A score between 600 and 680 will likely result in fewer loan options with higher interest rates. The lower you go, the more limited and unappealing your possibilities get.
Thankfully, if you're willing to put in some effort, you can access outstanding mortgage loans with low-interest rates. In addition, your credit score is updated every 30 days. Give or take a couple of months, and by making a few changes to your spending habits, you can turn a bad or fair score into a good (or better) one.
How to Raise Your Credit Score
There are several ways to begin raising your credit score, including two things you should start doing immediately. First, to increase your score, you need never make another late payment and catch up on any past-due bill you may have.
When using your credit card, you should also try to keep your credit usage to around 30% (or below) of your available credit. For example, if you have a limit of $1,000, you should only use $300 of it at a time. Making these changes could significantly improve your credit score and help you acquire low-interest mortgage loans. Unfortunately, you may just have to wait an extra month or two for your score to update.
A Professional REALTOR® can answer your questions
One of the many benefits of hiring a local REALTOR® is that they'll always be there to answer your questions. So whether you're concerned about mortgage loans, moving costs, or anything else, they'll have valuable insights to help you along the way.
They also have valuable knowledge on helping you buy real estate that suits your buying budget.
