Before you apply for a mortgage, it’s important to check your credit score. It's easy to do online through trusted sites like TransUnion or Equifax, and it doesn't cost anything.
The funny thing about credit scores is that you need to use credit in order to have a good score. However, you shouldn’t just assume that you have good credit just because you always pay your bills on time and save up for large purchases. If you don’t like what you see, you’ll have to work to improve your credit.
Learn more about how lenders use your credit score along with the other indicators that they’ll use when considering your mortgage application.
At a very basic level, the credit score is going to determine whether or not a bank will give you a mortgage at all. In general, a lender is going to look for a minimum score of around 640 for you to qualify for your mortgage.
Each lender has different thresholds, though. Some might accept scores that are lower if the person has a good income and few debts. Others may be looking for an even higher minimum score.
Perhaps most importantly, your credit score is going to determine the interest rate you’ll pay. We mentioned above that banks will often approve your mortgage application if your score is at least 640, but this score is on the low end of acceptable.
Someone who gets a mortgage with that credit score will likely be paying interest rates that are significantly higher than the advertised rates. On the other hand, those who have credit scores higher than 750 will have absolutely no problems qualifying for a mortgage, and they’ll be able to get a great rate.
Remember that just like the thresholds for qualifying for a mortgage, lenders have different rate bands that they use for determining the rates that borrowers pay. For instance, at one lender, the best interest rates might start for those with a 750 credit score; another lender might qualify people for their best rates with a score of 720.
It can pay off to apply through a few different mortgage lenders to see what kind of rates you can get.
This effect isn’t quite as obvious, but since your credit score affects how much interest you pay, it can also affect how much money you’ll be able to borrow. When the bank determines how much they’ll lend you, they’re not looking at the total amount.
They’re making a judgement based on the maximum monthly payment, and this monthly payment includes the interest and principal payment on the loan, plus some extras like insurance and taxes. The higher the interest you pay, the lower the amount of principal, so this means that you might qualify for less than you expected.
A credit score is important when you’re applying for a mortgage, but it isn’t the only thing that lenders are going to look at. For instance, they’re going to pay closer attention to the credit history.
How many credit cards do you have open and how long have you had them (longer is better)? Have you recently opened a lot of credit cards (a bad sign)? Does your credit history show any bankruptcies or late payments? They’ll pay more attention to the most recent activity, so be sure to act responsibly in the year or two before you buy your home.
Additionally, lenders are really going to focus on your debt-to-income ratio [ https://www.debt.ca/calculators/debt-to-income-ratio-calculator ] . They want the amount you pay for your mortgage to be less than 35 percent of your income. If you have a lot of other debt, they’ll want to see that your total debt payments - including things like credit cards and car loans on top of the mortgage payment - to be less than 45 percent. Again, these are general guidelines, and each lender may have different specific criteria that they use to make their decisions.
Clearly, the credit score is an important measure of whether or not you’re creditworthy. You need a good score to get the loan you want, and the better your score, the better the deal that you’ll be able to get on your mortgage. Take the time to educate yourself about your credit score to see where you can make some improvements.