Your credit score, also referred to as a Beacon or FICO score, is one of the weightier elements used by lenders to determine your eligibility to receive financing and to decide the rate they feel justified in charging you on your mortgage. Beacon scores tend to range from 300 to 900; 900 being perfect and very uncommon.
The average Canadian scores around the 700 mark. This grade, or greater, will secure you the best mortgage rates in Canada. For every ten points below 700 you are basically looking at a hike of one or two basis points, or 0.01-0.02 per cent, on the rate you are offered, down to 600 points. Below 600, down to 500, rates start spiking one to three full percentage points above the best rate available and qualification becomes more difficult, though not impossible.
About 20 per cent of all Canadians score below 600; 600 is the minimum you must score to secure an insured mortgage or a mortgage where less than 20 per cent of the property value is procured in down payment. Depending on the type of mortgage you are applying for, with a score of 600, a significant down payment and no delinquencies on your credit accounts over the last year, you should still be able to qualify for a good mortgage product.
Understanding Your Beacon Score
There are always ways in which you can improve your credit score. This is integral if you are planning on applying for a mortgage product where credit score is key in determining in your eligibility, such as in low document loans or rental property financing.
Firstly, you should know how the Beacon score is evaluated. Though only the creators, the Fair Isaac & Company (FICO) know the exact formula, the following weightings generally apply:
- Payment History: 35%
- Current amounts owed (debt): 30%
- Age of accounts (length of credit history): 15%
- Types of credit in use: 10%
- Credit inquiries (or applications): 10%
Every credit inquiry you make within the year prior to applying for a mortgage is a detriment. That is why employing a mortgage broker works to your advantage. Mortgage brokers have the ability to make just one credit inquiry and access several lenders to hunt down the best product available, allowable and suited to your circumstances.
Preparing for Mortgage Application
In the year leading up to your mortgage application, ensure that you do not apply for numerous credit products and that you are not late in making any payments toward the credit accounts you currently have open. One payment late by 30 days can drop your credit score by as much as 20 points.
Don’t close off credit accounts that you have maintained in good standing for a long course of time. The more proof that you are able to use credit responsibly for substantial durations, the better. Remember that mortgage amortization is usually in excess of 25 years, meaning a lender could potentially be providing your home financing for a large portion of your adult life.
Try not to have any credit products drawn to their maximums at the time of application. Bringing down balances to 30 per cent of their limits is ideal. If you can’t, then at least bring them down to 50 or 70 percent of their maximums. Paying down your balances can improve your credit score in as little time as one month.
If you are unsure as to where your credit rating stands, or if it could use a few months’ improving before you put in your mortgage application, check it out online. With Equifax you can receive your Beacon score instantly, order a copy of your Equifax credit report, or put your score under analysis for tips on how to bring it up to where you want it.