Improving Your Credit Score
What are important factors for Approval?
When you understand how a lender will judge your loan application, it is easier to see your own strengths and weaknesses as a loan applicant. A strong loan application will have these features:
- A housing expense ratio no greater than 32% (Now optional) (the lower the ratio, the better)
- A debt-to-income ratio no greater than 44% (the lower the ratio, the better)
- The home buyer has steady income – ideally, the same job for two years or longer
- The home buyer has good credit (bills have been paid on time)
- The house is worth the price the buyer is paying
One of the first questions a lender will consider is how much of your total income you’ll be pending on housing. This information helps the lender decide whether you can comfortably afford a home. If the house payment represents a large portion of your income, you’re more likely to have trouble making these house payments because of your other potential expenses (such as car, furniture etc.). On the other hand, if the house payment is a small portion of your income, chances are better that you can truly afford the house.
When you’re applying for a loan, the lender will look at your ‘gross income’. Your ‘gross income’ is all the money you earn before taxes, including overtime, commissions, dividends and any other sources. You must be able to show a steady history for these sources. For example, many lenders will count income from a part-time or seasonal job as long as you can show that you’ve had the job for at least two years.
One important thing your lender will do is compare your housing expenses now to the expense you’ll have if you buy a home. The smaller the increase, the stronger your application looks.
In addition to your income, a lender will look at your debts. Generally your debts include your house payment as well as payments on all loans, charge cards, child support, etc. that you make each month.
Your Employment History
You don’t need to be wealthy to qualify for a mortgage, but a history of steady employment in any occupation helps. Lenders are more likely to lend money to people who have worked for several years at the same job, or at the same type of job. However, if you’ve only been in your current job a short while, this won’t necessarily stop you from getting the loan, as long as you’ve had regular income over the last two years.
The lender will check your employment, usually by asking your employer to sign a statement that shows how long you have been on the job and how much money you earn. If you’re self-employed, or if you’ve been at your job less than two years, the lender may ask you for additional information (such as federal income tax statements) concerning your income and work history.
These are the kinds of questions a lender considers when reviewing your loan application (A steady, secure job will make your loan application stronger):
- Have you been at the same job for at least two years?
- Have you been in the same occupation for at least two years?
- Have you had gaps in your income over the last two years?
- How long do you expect to stay in your current job?
- Is the co-borrower (if any) employed?
- If either you or the co-borrower lost your job, how long would you be able to make your mortgage payments?
Your Credit History
Good credit is very important in qualifying for a loan. In addition to your ability to pay (as indicated by your debts and income), a mortgage lender will look at your willingness to pay. This will be judged by your credit record – that is, how well you’ve paid your loans and other debts in the past.
When you apply for a loan, the lender will order a credit report for you. It’s a good idea to order a copy of your credit report before you apply. It will show your record of payments on loans, charge cards and other similar debts. If you’ve never had a loan or a charge card, you can show that you have a good record of payment on your utility bills and rent.
Identity theft is a growing problem in Canada for both individuals and for lenders. To make sure no one is falsely using your identity to borrow money for a home, your lender or your lawyer will ask to see photo identification. They may also ask you some questions about your credit history to confirm the information that’s on record at the credit bureaus.
Your Property Value
When you choose a home, the lender will want to know that the house is worth the price you plan to pay. In fact, the loan amount that the lender approves for you will be based on the value of the property. The value of the property is a lender’s best assurance that they can recover the money they lend you – even if you stop making mortgage payments.
If you stop making payments, the lender has the right to sell your home to pay off the loan – a process called “foreclosure”. The lender wants to know that the property could be sold at a price that’s worth the loan amount.
If you decide to sell your home before you’ve finished paying off your mortgage loan, you’ll want a price that allows you to pay back the loan balance (and perhaps make a profit as well). That’s why it’s important to have a professional appraisal of the value of your home.
Less than Perfect Credit
Firstly, keep in mind that there are mortgage options out there for borrowers with less-than-perfect credit.
Many people have run into trouble or a shortage of cash flow from time to time that has resulted in the inability to make all of their payments in full and on time. This is one of the major reasons for poor credit history. However, just because you don’t have a perfect credit history does not necessarily mean that you will be unable to obtain a mortgage.
At Titan Mortgage Group we specialize in hard to place mortgages. We know that we cannot fix the credit issues overnight but we can provide a strategy that focuses on fixing the credit problems in the short term, with the ultimate goal of improving the “credit score”, so that we can obtain for you the best possible competitive rate on the market.
One of our recommendations for people with poor credit histories is to obtain a secured credit card. A secured credit card allows the cardholder to make a cash deposit on the card, and then whenever the card is used, it deducts the amount from the amount of the deposit you made. It’s much like a bank debit card, but a secured credit card deposit will earn interest, and help earn money when you aren’t spending with the card. In addition, as you continue to make deposits to the card to cover your purchases, you are helping to improve your overall credit score.
Equity Based Mortgages
If you have large down payments, but are unable to prove income or who may have damaged credit history we can now obtain mortgages based on 15% to 25% down payment. This product allows you to borrow up to 75% – 85% of the value of the home. The focus on this program is on the quality of the real estate and common sense underwriting.
The location and marketability of the property is very important. Typically clients receive higher rates depending on the quality of their credit.
How Can I Improve My Credit Score?
Your Equifax Beacon Score tells lenders how much of a risk you are, and hence it determines how much you’ll pay for your next mortgage. So it’s important to know what affects it. Beacon scores range from 300 to 900 (a perfect score). The average Canadian adult has a Beacon near 720. Many people think you need to be in the 800’s to get great mortgage rates. That isn’t the case. Only 11% of Canadians rank above 800, and it’s virtually unheard of to see a Beacon near 900 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, listed below:
|Payment History||35%||Factors include how recent, and number of, payments over 30 days late, collections, judgements, and bankruptcies. A single 30 day late payment can drop your score by 15-20 points.|
|Current Debts||30%||Consider how much you currently owe, how many creditors you owe money to and much you could owe if you maxed all your available credit.|
|Age of Accounts||15%||The longer your accounts have been open the better. You generally need a least three accounts over one year old.|
|Type of Credit||10%||Bank loans credit cards, and revolving credit accounts all affect your credit score differently.|
|Credit Enquiries||10%||Numerous credit applications in the past 12 months is a no no. The big benefit of using a mortgage broker is that they need only pull your credit history once to shop for multiple lenders on your behalf.|
Your credit score can jump considerably in as little as a month.
The moral of this story is, know your credit. Over 70-80% of Canadians have mistakes on their credit report. Don’t be afraid to check yours!
We recommend that everyone see what is in their credit report at least once a year. Building and maintaining a good credit history involves more than paying bills on time. It involves careful inspection of information that is reported on one’s credit file. Slight inaccuracies reported by lending institutions to the Equifax credit file can be the difference between good or poor credit.
Equifax Credit Reports cost $15.50 CDN and can be accessed through equifax.ca
To Contact Equifax
1-800-465-7166 between 8:00am and 5:00pm ET
Write to them at:
Equifax Canada Inc.
Consumer Relations Department
Box 190 Jean Talon Station