Credit Scores and Home Buying Success

When someone decides to buy a home, they often get a crash course in many areas of personal finance, including credit. Understanding a credit score and how it affects a person's chances of being able to buy a home is vital. By learning early about what is required, buyers can increase their chances of checking off all the boxes for success and move into that new home.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

What Is Included in a Credit Score?

Credit scores are numbers that banks and other financial institutions use to determine how likely someone is to repay a debt. They are based on factors that include a person's history, as well as their current circumstances. In Canada, a consumer's credit score can range from 300 to 900 points. Credit scores are created from data from two credit reporting bureaus, Equifax and TransUnion. Data that will influence a credit score can include answers to all of the following:

• How long have they been using credit?
• Do they pay their bills on time every month?
• How much debt do they carry?
• Do they have a good mix of credit products that include revolving credit and installment loans?
• Have they had property foreclosed on or have they declared bankruptcy?
• How many entities have made inquiries into the individual's credit history?

How High Does a Person's Credit Score Need to Be?

To qualify for a mortgage that is worth $1 million or more, a person generally needs at least a credit score of 600. In highly competitive markets, housing prices that high and higher are not out of the question.

Beyond Canadian law, however, there are a number of factors that can influence whether a bank wishes to give someone a loan. In some areas, banks are unlikely to provide a home loan to anyone who has a score under 650, for instance. This is because banks have their pick of many highly qualified buyers, so they decide to work exclusively with those who they feel can keep up with the commitment of owning a home.

How Can a High Credit Score Help?

A high credit score doesn't just mean the difference between being able to buy a Westshore home or getting turned down. It can also make things easier throughout the life of the loan. People who have high credit scores may be able to get approved for higher loans. This can mean getting a chance to purchase a home that may otherwise be out of reach.

A lower down payment may be necessary with a higher credit score. This can mean being able to buy far sooner. Since mortgage payments are often less than rent for equivalent homes, this can mean spending far less on rent and investing more into a property the individual owns. Plus, someone with a higher credit score may secure a lower interest rate. This is because the bank feels they are taking on less risk, and thus do not need to bring in as high a profit from the initiation of the loan. Over the span of a mortgage, an interest rate that is even half a percent lower can represent tens of thousands in savings.

How to Earn a High Credit Score

Responsible financial decisions that start early can help ensure a higher credit score throughout a consumer's life. Opening a credit card at a relatively young age, for instance, and paying the bills on it regularly means a longer credit history. If someone just starts building credit when they begin considering buying a home, there is no way to catch up.

Watching spending and never buying without knowing how to pay off a debt can also help. This keeps balances low, which shows both restraint and an ability to take on other debt. Using only a portion of available credit can also push a score higher. Assiduously avoiding public record issues like bankruptcy and foreclosure is a huge help in building a high score. These events affect a credit score for years on end. For instance, a first bankruptcy stays on a credit report for six years. A second one will remain for 14. While it is possible to get credit once a bankruptcy is a few years old, the terms will be more strict.

If someone wants to buy a home, the earlier they start cultivating good credit, the better. Careful attention to a person's finances can pay off through better borrowing opportunities. Carefully assess options to make sure that the choices made now support goals for the future.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.