What determines a good credit score and how to make sure you can qualify for a mortgage?

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Credit is one of the major challenges many new homebuyers face. Securing affordable financing based on an applicant’s credit score, which may be bruised or simply not yet established, is something first time home buyers often struggle with. The first step to improving your credit score is to understand how your credit is evaluated.

A credit report is detailed history of how consistently you meet your financial obligations, such as loan, bill and credit card payments. A “credit score” is a number that is calculated based on personal information from your credit report and other sources – this can include your debt payment history, how often you seek new credit accounts and how much of your credit limit you use. This number represents your overall credit worthiness or presumed reliability when it comes to meeting financing obligations. Basically, the higher the number – the better. In order to determine your credit worthiness for mortgage purposes, a mortgage broker would usually have to take a look at your credit report before submitting a mortgage application. 

Borrowers with high credit scores and a good credit report have access to better rates and a wider range of mortgage products.

Keep your credit healthy by following these simple guidelines:

1. Always pay your bills on time

2. Use only up to 50 per cent of your credit card’s limit, and pay it off each month.

3. Check your credit report for mistakes from time to time by ordering one from Equifax and/or Trans Union.

When mortgage lenders review mortgage applications, they take into account both the applicants’ credit report and credit score, as well as other factors such as income, employment history and the size of down payment available. Applicants with bruised credit may find themselves paying higher interest rate or even being denied mortgage financing entirely, that’s why it is recommended to seek professional advice before applying for mortgage financing. If, for example, your credit is currently weak, a mortgage broker can advise on how to prepare your credit beforehand and receive a better mortgage deal down the road.

While improving one’s credit takes time, a more immediate solution to weak credit is  through the help of a friend or a family member. By agreeing to co-sign on the property, family or friends can help borrowers who have trouble qualifying due to income or credit that is not yet well established. One thing to remember is that a co-signer has the same legal responsibilities as the homebuyer, and is responsible for paying mortgage if the principle borrower fails to do so. Co-signers don’t have to be family members, but many lenders require that they live on the property.

Another point to remember is if someone is providing assistance to a family member as a co-signer now may limit their own borrowing potential in the future. If the co-signer is ever considering getting a loan in the future – a car loan, a mortgage, or even increasing their existing mortgage, they may no longer qualify. 

Having said that, family assistance in purchasing a home is quite popular, and the Genworth Family Plan is a great option for families looking to buy together. So long as they have good credit, it allows parents to purchase a home for their children or even their elderly parents who wouldn’t qualify on their own, and with only five percent down (as opposed to 20 percent, which is generally required for secondary properties). For this option it is important to talk to a professional mortgage broker who can go over the details and create a plan of action, custom tailored to your currernt situation, needs and preferences.

We are here to help. Contact us today for a free no-obligation consultation.

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