Your credit is more important than your income when it comes to mortgages.
A mortgage is obtainable with a relatively low income. However, you cannot get a AAA mortgage with damaged credit. This is irrespective of your income. It is hard to believe that credit is not taught in schools or to young adults as a basic, life essential skill.
Your mortgage is the biggest debt that you will carry. This is why it is important that you have good credit so that you can qualify for the lowest cost (interest rate) mortgage. Poor or damaged credit has a cost. Just have a look at the example below:
Let’s use a mortgage of $300,000 over a period of 5 years
Damaged Credit: 5% interest rate. Interest Paid: $70,211.00
Excellent Credit: 2.49% interest rate. Interest Paid: $34,406.00
The costs of damaged credit in this case is double that of someone who has good or excellent credit.
Canada has predominantly two credit reporting agencies that lenders use:
Remember, your credit report contains your information. Lenders will evaluate it to determine what kind of mortgage they will offer you. We highly recommend that you check your credit at least once a year to make sure you agree with what is on it. If the information is incorrect you can fix it. It is also important to note that you are allowed to put a personal note on your own credit bureau. This is very useful to explain life events that caused your credit to be damaged.
Here are a few tips that will help you build and maintain your credit:
- Make sure your information on the credit report is complete and accurate. If not, it can be mixed up with someone else’s who might have poor credit and it can take a long time to unravel the mess.
- Try not to have your credit checked more than 4 times a year.
- When you seek credit, make sure the representative from the organization explicitly asks for your permission before they check your credit; it is their duty.
- Have two credit facilities (Credit card, Line of Credit, etc.) for at least two years or one for five years.
- If there is more than one mortgage applicant, all applicants must have good credit.
- No credit is NOT good credit.
- Maintain a credit score of at least above 680, preferably above 700.
- Make sure your credit facilities are substantial and from reputable organizations. e.g. a car loan, credit card or line of credit. Try to avoid building credit from store credit cards.
- Don’t miss any payments on any credit facilities.It is important to note that the facilities that affect you the worst are missed mortgage and car payments.
- Be careful of insignificant credit facilities such as cell phone bills. Although they cannot build your credit they can damage it significantly.
- Make sure that your balances stay below 75% of the credit limits of your credit facilities. Having credit cards maxed out or over limit, have a very detrimental effect on your credit score
- It is much more prudent to pay off all your credit balances every month. It is also important to pay at least the entire minimum payments specified on your statement.
- Try to avoid a consumer proposal or bankruptcy at all cost even if you are in severe debt. Both of these will affect your credit severely. You will be subjected to higher interest rates long after the bankruptcy. This will often end up costing you more in the long term than the forgiven debt under the bankruptcy.
- Try not to co-sign for any debt. You will have no control over the other person’s credit habits. Their repayment habits will affect your credit severely. Their full monthly liability will be added to your debts too, which might cause you not to qualify for your own mortgage.
- If you have paid off a credit facility such as a car loan, make sure it is closed. Paid off, but left open credit facilities can be a cause for identity theft.
- If you pay off a debt or a credit facility make sure you get it in writing from the lender that the facility is closed, since this will force them to stop reporting to the credit reporting agencies. It will also ensure that the facility will disappear from your credit report 6 years from the closed date.
If you don’t understand your credit, get a copy and make an appointment with us. We will explain it to you and help you to optimize it so that you are in the best possible position for your mortgage or any other lending.