When it comes to buying a home, your credit score is one of the most important factors that lenders will consider when determining what you qualify for in regards to a mortgage. In this article, we'll take a closer look at what exactly credit scores are, why they're so important, and how you can improve yours to qualify for a mortgage.
A credit score is a numerical representation of your creditworthiness, based on information in your credit report. The most commonly used credit score in Canada is the FICO score, which ranges from 300 to 900. The higher your score, the lower the risk you pose to lenders, and the more likely you are to be approved for a mortgage or any other type of loan.
Lenders use credit scores as a way to gauge your ability to repay a loan. A good credit score indicates that you have a history of paying back loans responsibly, which includes paying bills on time, maintaining a low balance on credit cards, and not having too many inquiries from creditors at once. What traditional lenders (banks, credit unions, monoline lenders) consider to be an acceptable credit score is 650 and above, keeping your credit score above that mark should ensure your approval will go through smoothly.
However, a low credit score can indicate that you've struggled to manage credit responsibly in the past, which can make it difficult for you to qualify for a mortgage. Lenders view borrowers with low credit scores as higher risk, and as a result, may require a larger down payment, charge a higher interest rate and possibly lender fees at closing.
To improve your credit score, there are several things you can do. One of the most important is to make sure that you're paying your bills on time. Late payments can significantly damage your credit score, so it's crucial that you stay on top of your bills and pay them on time. Not only will late payments impact your credit score but they will stay on your report for 7 years and negatively impacts your chances of getting a mortgage, regardless of your credit score.
Another way to improve your credit score is to keep your credit card balances low. High balances on credit cards can indicate that you're overextended, which can negatively impact your credit score. Instead, try to pay off your credit card balances in full each month.
It's also important to avoid applying for too much credit at once. When you apply for credit, lenders will pull a copy of your credit report, which can cause a hard inquiry. Hard inquiries can lower your credit score, so it's best to avoid applying for credit unless it's absolutely necessary.
Finally, it's important to check your credit report regularly to ensure that the information contained in it is accurate. If you find errors on your credit report, you can dispute them with the credit bureau and have them corrected.
In conclusion, a good credit score is essential when it comes to qualifying for a mortgage. Improving your credit score takes time and effort, but it's well worth it in the long run. By paying your bills on time, keeping your credit card balances low, avoiding applying for too much credit, and regularly checking your credit report, you can improve your credit score and increase your chances of being approved for a mortgage.
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