Getting approved

Millions of Canadians want to improve their credit

Getting your credit score to 600 or above is important when it comes to having access to the lowest cost financing available in the market. The cost of credit or in other words the interest rate that you pay on your mortgage is all linked to the “risk” the lender thinks they are taking in providing you the loan.

A higher credit score is supposed to show a stronger financial position and a better track record of making loan payments on time. Lenders in turn will compete more aggressively for high credit rated clients and offer lower rates of interest to entice them to do business with them.

There are several factors that drive credit ratings such as the number of times that an individual has applied for credit and the number of those times they have been turned down. If all credit tracked on a credit score shows every payment being made on time then the total score will be higher.

One rarely known factor on a credit score is the total outstanding balance on any revolving credit like a credit card of line of credit. If you are sitting at a balance greater than 50% of the amount available on your credit cards then your score will be lower than if you had paid down your credit cards below 50% outstanding in the month before you obtain your report

Credit can quickly be negatively impacted but at the same time can be improved significantly in only 12-24 months. It requires active management initially before buying a first home to improve the score and prepare to have the best mortgage application possible to obtain the lowest rate.

You can obtain your own credit report from Equifax, the credit reporting company in Canada. This will let you see how you rank as a borrower and give you time to improve your rating if necessary. Knowing your score before you apply to a bank is a great step to having confidence and saving significant amounts of money in reduced interest cost on a mortgage.

Obtaining mortgage approval

Taking the important step of getting pre-approved for a mortgage affords you confidence. You’ll know in advance exactly how much financing you can comfortably handle.

The pre-approval process is the time when you will be introduced to the often intimidating world of banks and mortgage providers and it is often easier to go through the steps before you select the home you would like to purchase.

When you meet with your financial representative, if there’s anything you don’t understand, ask. Ask lots of questions. The terms of your mortgage could amount to more in cost than a small savings in interest rate from one bank to another. It is important that you are dealing with an expert and they know exactly what your plans are to advise you on the best fitting mortgage options.

You would be surprised how often you may not be pre-approved by a lender because the lender has run out of funding for the month and you happen to apply with them at the wrong time (remember – they will never say it is their fault you don’t qualify).

The financial services industry is very competitive. If one company doesn’t want your business, someone else will.

Credit score

The credit score is a ranking calculated by the credit rating agency based on your credit history to provide lenders a simple number to gauge the potential “credit risk” for any new loan that a person is seeking. Some key issues that affect a credit score include:

  • Missed payments on loans or credit cards in the past
  • High balances on existing credit cards (above 50% of your credit limit for extended periods of time)
  • The number of times any lender has requested a credit report on you

To manage the impact of these on your credit score, make sure to always pay at least the minimum monthly payment on any credit cards and make all required payments on fixed-term loans or lines of credit. The more consistent your payment history is on any loan or credit card, the better the bank will feel about providing a mortgage to buy a home. Keeping your credit card balances below 50% of their limit and applying for credit only when necessary can help improve your credit score.

When it comes time to get a mortgage, if you have a good credit score and qualify as a “strong borrower,” you’ll be able to negotiate the lowest interest rate possible on the loan and save yourself significant interest costs of the life of the mortgage.

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