Becoming a homeowner is a dream many people have the world over. But what many people aren’t aware of is the effect your credit score and past financial history will have on the application process. With lenders handing over vast sums of money, it is beneficial to expect they will get a return on their investment and the people they are lending it to are in an excellent position to pay it back on time.
So how can you get yourself into the best position possible for applying for a mortgage and improving your credit score at the same time?
Look at Your Debt Ratio
A mortgage provider will use two different debt ratios to determine how much you can afford to borrow, your Gross Debt Service Ratio (GDS) and your Total Debt Service Ratio (TDS). Your GDS is the percentage of your monthly income used to pay for your housing expenditures each month. The Canada Mortgage and Housing Corporation (CMHC) recommends maintaining a GDS of less than 35 percent and a TDS of less than 42 percent. Your TDS is similar to your GDS in that it takes into account your housing costs, but it also takes into account your other debts, such as auto payments and credit card debt.
Pay down your debts before your application to improve your income to debt ratio and boost your chances of getting approved the first time. A better debt ratio will give you more favourable rates and offers. This is also a handy tip when looking at switching mortgage lenders at renewal.
Improve Your Credit Score
Credit scores range from 300 to 900 points. The points are divided into five categories: poor, fair, good, very good, and excellent. The specific categories differ depending on which credit bureau is utilized, but the method is generally the same regardless. Credit scores are a reflection of your entire financial health, so you must be aware of your credit score.
Banks and other financial institutions will analyze your credit score to determine your financial reliability and ability to repay your debts. The better your credit score, the more likely you will be awarded the best mortgage rates available in Canada. In an ideal situation, you would have at least 660, but a higher score is always preferable. Besides containing your overall numerical score, your credit report will also have information on late payments, how many accounts you have open, your total amount of debt, and the length of time you've had credit. Making loan and bill repayments on schedule and not using up too much of your available credit will typically result in a higher credit score.
Make Sure Your Income is Stable
When qualifying for a mortgage, you must maintain your current employment. Full-time work is the best method to demonstrate this, as it ensures a consistent source of income over the long term. Although it is not the only factor to consider, long-term employment with a company will also benefit your application. For couples applying for a mortgage together, having both work full-time is preferable to having neither of you work part-time.
Matt Hoffer is a crypto enthusiast and gamer. When he's not de-constructing the blockchain, you can find him chilling with some lemonade in the shade or playing a round of golf.