May and June are the busiest months for real estate in Canada - and that means homebuyers will soon be out in full force. It also means many prospective buyers are visiting their lenders, and asking for mortgage financing for their new dream home purchase. However, a new BMO study finds they may be in for a surprise - more than half of Canadians haven't checked their score prior to their application, and may be blindsided by their credit standing. As banks base their decision on how much money you'll receive on your credit score and report, some buyers may find they don't make the credit-worthiness cut.
Here are a few tips for avoiding credit score disappointment when applying for your mortgage.
It may be too late for the buyers already knocking on bank doors - but for those considering buying a home in the near future, it's smart to start investigating your credit situation now, and ways to improve it. If you've ever borrowed money or opened an account - which 22 million Canadians have - you'll have a score. It's not a bad idea to check it once a year - despite the rumuors, your credit score won't be affected by the number of times you check it (a hard hit on your score, such as when a lender checks it, has a greater impact). For a fee of $24.95, you can get your credit report instantly from Equifax, or from TransUnion for $14.95. Expect to pay an additional fee to get your score along with your report, and be prepared to provide your social insurance number, driver’s license and other identifying information to fill in the online form. You can also get your report for free if you can ask for it to be mailed to you.
Once you have the report, scrutinize it to make sure all the information is true. Some credit bureau watchers estimate that there are errors in 10 to 33% of credit files, so don't be shocked if you find one. Just take the steps to get it fixed by notifying the credit reporting company immediately. In some rare cases this could also be a case of identity theft of someone trying to take a loan out in your name.
Your credit score is a number between 300-900, based on specific information that’s in your credit report, and the higher the number the better. Lenders all calculate their own credit score using the information provided by the two major credit-reporting agencies, Equifax Canada and TransUnion. They are trying to predict the likelihood that you will repay your debt. We don't know exactly how this number is calculated, but we do know what factors affect it the most. Credit score is determined by your payment history, outstanding debt, credit history age, applying for new credit too often and the type of debt you are looking for (long term debt vs. short term debt). Your credit score can also be affected by asking for pre-approvals at too many financial institutions - yet another argument for using a mortgage broker, who will pull your score only once, and use it among all lenders. Here’s the good news - 27% of us have a score somewhere from 750 to 799. In this range statistically, the chance of defaulting is 2$ in the next two years - so with a score like this you should have no problem getting a loan.
The number one way to improve your score is to not be late on payments, so start paying your bills on time, even if it’s just the minimum. When it comes to mortgages, Canadians are diligent; only 0.38$ of all mortgages in Canada were in arrears as of January 2015, which means they more than 90 days late on a payment.
When it comes to late credit card payments, though, Canadians aren't as disciplined. It's important not to max out your credit, and experts recommend using only 50% of your available credit at any time, including all your credit cards and lines of credit. It's also have some credit history. Do this by using your credit card regularly. You don’t have to charge much - just show you had a few transactions each month and that you have paid it in time. This will show your lenders that you're a responsible borrower.