What is a good credit score for a mortgage application?

This is a question I get quite often. With tightening credit standards in the atmosphere, it is important to know what number you should aspire for. Many lenders use the credit score to determine whether you qualify for a mortgage, how much you could qualify to purchase and how much down payment you will need to place towards a home.

In my professional opinion, I would say that if your score is over 720, you have nothing to worry about. You should qualify for almost any type of mortgage with this score. For a zero down mortgage (which is about disappear with the new government regulations), the minimum credit score requirement is 680.

A score of 720 score is really not that hard to achieve. This would put you in the upper 60% of the population. At this level, your credit bureau will probably show that you meet all your debt obligations on time and you’re not maxing out on your credit cards.

The new government rules that is set to take effect on Oct 2008 will require a minimum credit score of at least 620 to obtain a mortgage with 5% down payment. At a score of 620, the lender will want to understand why your score is low. If the lower score is due to repeated delinquencies or collection items, then your application could still be denied. However, if the reason is because of say, high balances on your credit cards, then some lenders may find this acceptable.

A lower credit score can costs thousands of dollars in extra interest costs or missed opportunities. So, if you are planning take out a mortgage or refinance your home, you would be well advised to make sure that your credit score is as high as it can be. If you are unsure as to how to increase your credit score, I strongly recommend that you consult a mortgage broker. I am always happy to educate anyone who would like to learn more about how your score is arrived at and help you develop a strategy to raise your credit score.

How to Qualify for the Largest Mortgage Amount

With the high cost of property in the Metro Vancouver area, how does one qualify for the largest possible mortgage amount? Here are a few tips:

1. Have a good credit score - Having good credit has its privileges. Mortgage insurer guidelines now allow borrowers to spend up to 44% of their gross income on debt payments (including the mortgage on your new home). Not all lenders are implementing this guideline so you do need to shop around to find a lender that will finance you to this limit.
2. Take an extended amortization - An couple with a combined income of $60,000 can increase their mortgage qualification from $330K to $400K by increasing their amortization from 25 years to 40 years.
3. Minimize your other debt payment - Any payments you make to other creditors (auto loan payments, credit card payments, etc.) will reduce the amount you are allowed to borrow. You have two options: (a) You can fully pay these debts; or (b) apply to reduce the payments (possibly by getting a consolidation loan from your bank).
4. Consider purchasing a property with a rental suite - A portion of the rental income can be treated as a reduction to your mortgage payments resulting in a significant boost to the amount you qualify for.
5. Use a mortgage broker - Credit policies differ among lenders. Consequently, the amount you will get pre-approved for will depend on the lender you go to. This is why you need a mortgage broker. We know which lenders are providing the most favorable terms so you can get the mortgage amount that is right for you.

With these new guidelines, many of the first time home buyers that come through our doors are pleasantly surprised by the amount they qualify for. In many cases, they have been to their bank and they have been told that they qualify for much less. Of course, we don’t suggest that you buy a property that will stretch you financially. We believe that our job is to let you know how much you will be approved for. It is your decision as to whether you think you should go to the limit.

The Top 5 Credit Misconceptions

(From Transunion’s September 2007 newsletter)

#5: Closing old accounts will improve your credit score
#4: Co-signing a loan doesn’t make you responsible for the account
#3: Paying off a negative record will get it removed from your credit report
#2: Paying off a debt will make your credit score jump up 50 points right away
#1: Checking your credit reports will lower your credit score

Experian study shows that 30% of US Consumers improved their credit score in 6 months

In a study of US consumers from January to June 2007, it was found that 30% of US consumers were able to increase their credit score by 50 points over a 6 month period. This shows that it is possible to bring up your score significantly over a short period of time by making wise credit choices.

Credit scores can influence your ability to obtain a mortgage at favorable terms since it is a measure of your credit risk. Your credit score will determine what interest rate you pay on your mortgage, how much you need as a down payment and the repayment terms of your mortgage. Individuals with a very low credit score may not even qualify for a mortgage.

The study also found that:

• 41 percent of the U.S. population showed no change in their credit score from January to June 2007
• 2 percent of the U.S. population had their credit score improve by 51 to 100points from January to June 2007, whereas 3 percent of U.S. consumers saw their score drop 51 to 100 points during the same time period
• Nationwide, 23 percent of consumers had their credit score drop up to 50 points from January to June 2007
  

Click here to read the complete article.

If you’re looking to purchase a home within the next few months, you must make sure that you have the best credit score possible. I offer free one-on-one consultation on how you can increase your score. Raising your score takes time so start now!

Improving your credit score

For most lenders, the credit score on your credit bureau is the single most important determinant of your ability to access credit.  It can also affect the rate of interest you are charged when you borrow.  It is well worth your time to ensure that you maintain a good credit score.

It is easy to check your credit score.  There are two major credit bureaus in Canada - Equifax (www.equifax.ca) and Transunion (www.tuc.ca) .  In Western Canada, Equifax is the more commonly used one.  You should be able to access your credit score online for a  small fee.

If your credit is not good and you plan to obtain a mortgage in the next few months, it is very important that you get a copy of your credit bureau.   I can coach you on how you can improve your credit score so that you can obtain the best rates possible.

Don’t apply for credit when you need it

During the past week, I’ve encountered mortgage applicants telling me that they never applied for credit since they never needed it.  They’ve always had enough cash to meet their day-to-day requirements.  Unfortunately, now that they are applying for a mortgage, they have no credit.  With no credit, it becomes very difficult for lenders to judge whether an applicant is responsible in handling credit.  While it is still possible to obtain a mortgage without a credit history, it will be more expensive for the borrower since lenders will charge a higher interest rate to cover for the risk.

We never know when we will need credit.  Things happen that we don’t anticipate such as a family emergency or medical bills.  Don’t wait until you need credit to apply for it.  You may not get it.  We should always have credit available to us and our spouses/partners.

Once in a while, get a copy of your credit bureau.  Check it’s accuracy.  If your score is low, improve it.  I can suggest ways for you to improve your credit score.  You can obtain a copy of your credit score online at www.equifax.ca and www.tuc.ca

Credit Score - What determines credit scores?

Most people don’t understand credit scores or haven’t even seen their credit bureau.  If this is you, I recommend that you review your credit score as soon as you can.  Your credit score is a major factor in determining whether you can get a mortgage, how much down payment will be required, how much money the bank will lend you and what rate of interest you will be charged.

Your credit score ranges from 300 to 900.  The higher the score, the better.  The credit score predicts your probability of defaulting on your debts within the next 2 years.

How is the score determined? There are five criteria: (1) Your payment history; (2) Amounts owed; (3) Length of credit history; (4) New credit; (5) Types of credit in use.

Knowing the factors will allow you to improve your score.

It takes time to improve your score.  You should work with a mortgage broker who can guide you with a strategy to improve your score.   At BCMortgage.ca, we provide you with a copy of the FICO booklet.  The booklet prepared by Fair Isaac Corporation, the company responsible for creating FICO scores, is an indispensible tool since it explains how the scores are arrived at.  Once you know how scores are determined, you will be able to determined a strategy to bring your score up.

John