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A Sunshine Coast mortgage and your credit score, what’s the connection?

A Sunshine Coast mortgage and your credit score, what’s the connection?

Time and Date January 31st, 2013 User by menno@menno.ca Comments 8 Comments

Since most people need mortgage money when they’re buying a home (only a few can afford to pay all-cash), it’s good to understand the connection between applying for a mortgage and your personal credit score.

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A Sunshine Coast mortgage and your credit score, what’s the connection?

A Sunshine Coast mortgage and your credit score, what’s the connection?

Time and Date January 31st, 2013 User by menno@menno.ca Comments 8 Comments

Since most people need mortgage money when they’re buying a home (only a few can afford to pay all-cash), it’s good to understand the connection between applying for a mortgage and your personal credit score.

The banks make it sound like applying for a mortgage loan is easy - but with what goes on behind the scenes it's actually a very complicated process.

The banks make it sound like applying for a mortgage loan is easy - but with what goes on behind the scenes it's actually a very complicated process.

When you make a mortgage application, you have to go through the wringer in order to qualify. For many people, it’s not particularly easy to jump through all the hoops. The bank will look at you in a number of ways. First of all, they’ll want to make sure that you can actually afford to pay back your mortgage loan. Your ability to pay back the mortgage loan goes a long way in your credit application. If you have sufficient income (by a certain formula) then you may qualify. Income alone, however, is not enough. The bank will also look at your collateral, of which the house you’re buying will be a part. This is where they may also do a property appraisal, on your behalf.

The bank will also want to make sure that you are of “good character”. For that they’ll take a look at your “credit score” (the Beacon Score) to get a quick view of your financial stability as far as your credit history is concerned. The credit check is an important part of a credit application, basically the better your score, the easier it is to get credit. In fact, your credit score weighs down on you at many times. Most people realise that it’s important to take care of a credit record and to try and make the score higher. Beacon scores range from 300 to 900 (a perfect score). The average Canadian adult has a Beacon near 700. The score tells lenders on the basis of statistical probability, how much of a risk you are. It’s important to know what affects it.

Some believe you need to be in the 800’s to get great mortgage rates. That isn’t quite the case. Only 11% of Canadians rank above 800, and it’s virtually unheard of to see a Beacon near 900. All you really need is 680-700 to get the best mortgage rates. Even 600 can get you a decent enough deal if you can prove income and haven’t had any delinquencies for at least the last year. Currently, 600 is the minimum credit score for insured mortgages. That means you’ll need at least a 600 score to qualify for good rates on mortgages with less than a 20% down payment.

The banks make it sound like applying for a mortgage loan is easy - but with what goes on behind the scenes it's actually a very complicated process.

The lower your credit score, the more difficult it's going to be to qualify for a mortgage loan; or actually for any kind of loan.

A LOWER SCORE, IS THAT POSSIBLE?

If your score is below 600, you’re what lenders call a “B” client (i.e. there’s issues with your credit that banks won’t like). 1 out of 5 Canadians are in this boat. Your credit can be fixed and there are still lenders willing to provide mortgage funds if you have a big enough down payment. Some deals get done with Beacons as low as 450! Also interesting is that scoring needs depend on the type of mortgage you require. For example, mortgages for the self-employed, or for rental properties, often require higher scores.

Here’s a table showing the approximate effect of different Beacon scores on mortgage interest rates. It gives you a rough sense for how rates go up as your Beacon score goes down. This is not a list that is used by all banks or in all circumstances. It’s merely a general suggestion.

Also, banks won’t describe your mortgage situation in terms of a surcharge on the best possible rate. In a one-on-one situation, they will give you a discount on the posted rate. Almost everybody can get a discount on the posted rate. It’s just that the likelihood of a discount increases with your better credit score. The reverse terminology of “discount” versus “surcharge” sounds much more appealing to most people – although the end result might be exactly the same.

Beacon Score Interest Rate
700+ The best rate
680-699 +0.00 to +0.20%
650-679 +0.30%
620-649 +0.40%
600-619 +0.50%
580-599 +1.50%
540-579 +2.00%
500-539 +3.50%
The banks make it sound like applying for a mortgage loan is easy - but with what goes on behind the scenes it's actually a very complicated process.

You can only benefit from a higher credit score. There are no arguments against it. Therefore, it's a good idea to make sure your credit score is as high as possible.

MAKING IT BETTER: YOUR CREDIT SCORE

Assuming you want to improve your credit (and who doesn’t?) you should know how the Beacon formula is calculated. Here are the main criteria:

Component Weighting Notes
Payment History 35% Factors in the frequency of, and number of, payments over 30 days late, collections, judgments, and bankruptcies. A single 30-day late payment can drop your score 15-20 points.
Current Debts 30% Considers how much you currently owe (in absolute terms and compared with your credit limits), how many creditors you owe money to, and how much you could owe if you maxed all your available credit.
Age of Accounts 15% The longer your accounts have been opened the better. You generally need at least three accounts over one year old.
Type of Credit 10% Bank loans, credit cards, and revolving credit accounts all impact you differently.
Credit Enquiries 10% Numerous credit applications in the past 12 months is a no-no.

Besides the obvious (bankruptcies, judgments, etc.) the top Beacon killers are:

- Payments over 30-days late

- Maxing out credit cards (i.e. using over 70% of a high credit limit)

- Seeking too much credit in a short period of time (e.g. applying for 4 credit cards in one month)

The moral is: know your credit score and manage it carefully. Over 70-80% of Canadians have mistakes on their credit report. Don’t be afraid to check yours and ask for corrections if necessary!

You can only benefit from a higher credit score. There are no arguments against it. Therefore, it's a good idea to make sure your credit score is as high as possible.

Ignorance is not bliss when it comes to borrowing money - or to mortgage loans in particular. Below are some tidbits (links) to read up on this topic.

MORE about mortgage financing can be found in the following blog articles:

Fixed of variable mortgage? http://www.mennorealty.ca/Blog.php/eternal-mortgage-question

Proving income, how to: http://www.mennorealty.ca/Blog.php/proof-of-income

Please feel welcome on the BC Sunshine Coast: http://www.menno.ca/?p=19944

Mortgage loan help from CMHC: http://www.mennorealty.ca/Blog.php/cmhc-can-help

Paying less mortgage interest: http://www.menno.ca/?p=19982

Mortgage money strateties: http://www.mennorealty.ca/Blog.php/market-strategy

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8 Responses to A Sunshine Coast mortgage and your credit score, what’s the connection?

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