Credit Score Basics
Part 1 - Credit Score Basics for Mortgage Hunters
It’s no surprise to anyone that your credit score is a heavily weighted factor when applying for a mortgage. What always surprises me though is how many people have no idea what their credit score is or whether there are any errors on their report. Did you know you can get a free copy of your credit report mailed to you by Equifax? I highly recommend ordering a copy if you have never looked at your credit report.
Your credit score (or Beacon score, as we commonly refer to it in the mortgage industry) is an indicator that tells lenders how much of a risk you are to lend money to and consequently, determines how much money you will be approved for when obtaining a mortgage. It’s important to know what affects it.
Beacon scores range from 300 to 900 (a perfect score). The average Canadian has a Beacon score close to 700. Only 11% of Canadians rank above 800 and it’s virtually unheard of to see a Beacon near 900. To obtain the best mortgage rates, you would want a score of 680-700.
As of October 15, 2008, 600 is the minimum score required for insured mortgages which means you need at least this to qualify for good rates on mortgages with less than a 20% down payment. If your score is below 600, you are what lenders call a “B” client (ie: there are issues with your credit that banks won’t like). 1 in 5 Canadians fall into this category but this does not mean you cannot qualify for a mortgage. There are still lenders willing to give mortgages to the credit challenged, you just must have a larger down payment and expect to pay higher than market interest rates.
There are many factors that go into awarding a Beacon score to an individual and how it is calculated. The main categories are: Payment History (35%), Current Debts (30%), Age of Accounts (15%), Credit Inquiries (10%), and Type of Credit (10%). Remember that there is a minimum 15-30 day lag before information is updated to your credit bureau so identifying problems early (ideally before applying for credit) will help you greatly. Occasionaly I will have a client that has an incorrect debt collection account (for example), and it can take months before that is removed from the credit report and until that is done, has adversely affected their Beacon score. Regarding credit inquiries, remember that a mortgage broker only does one credit inquiry when shopping for a mortgage as opposed to individually visiting banks to shop their products where each lending institution will pull their own credit report. If you are on the cusp for a certain product or rate (self employed and rental products often require higher Beacons), this could push you out of qualification range!
Stay tuned next Thursday for some tips on increasing your Beacon score and the common misconceptions about credit that I see daily in my job as a mortgage broker.
Nicole Turcotte
Mortgage Broker
www.meridianpacific.ca
(Partial Source: Canadian Mortgage Trends)