Why Are Credit Scores Important for Obtaining a Mortgage?
In the world of personal finance, credit scores are all the rage - and for a good reason. Credit scores can be the deciding factor on whether or not you're able to achieve some of your goals. A big goal that many people have is to purchase a house, and one thing they must keep in mind is that their credit scores will have an impact on their ability to qualify for a competitive mortgage.
To learn more about the relationship between mortgages and credit scores, continue reading below.
Credit Scores and Mortgages: The Basics
Your credit score is important when it comes to mortgages because it can ultimately influence how much interest you will be paying. The ideal lender to get a mortgage from is major banks. It's best to get a mortgage from a major bank because they usually offer the lowest interest rates.
You can also obtain a mortgage from a trust company or private lender, but these options may offer less favourable conditions than a bank. Typically speaking, trust companies have medium level interest rates, and private lenders have the most expensive interest rates.
What is the Ideal Credit Score for a Mortgage?
To obtain a mortgage with a major bank, the ideal credit score to have is above 700. The higher your credit score, the better chance you have at getting approved by major banks. As for trust companies, they specialize in individuals with less than stellar credit. It's usual for them to cater to those individuals that have credit scores below 700. Finally, individuals with credit scores below 600 will likely have to work with a private lender to obtain a mortgage.
Keep in mind that the above credit scores are just benchmarks. Lenders vary in their approval requirements and processes, which means that each lender's credit score requirements will vary. If you don’t know your credit score, there are a few Fintech companies out there that can help you get your credit score for free.
If your goal is to obtain a competitive mortgage, a good starting point for your credit score is 700. With that in mind, it's good practice to boost your credit score as much as possible before applying for a mortgage, regardless of what it currently is.
What Else Do Lenders Consider?
Lenders rarely make an approval decision based solely on a credit score. They will evaluate other aspects of your finances to gain a complete picture of whether you're a good candidate for a mortgage. In addition to credit scores, lenders also consider the following:
Income and expenses
Stability of income
The amount you're requesting to borrow
The amount for your down payment
Current debt levels
What Can You Do To Improve Your Credit Score?
Thankfully, bad credit is never forever credit. If one of your financial goals is to purchase a home and you have a poor credit score, it's time to start improving your financial habits. Remember, patience is key. Credit scores won't increase overnight; it requires dedication to change your financial habits and stick to them.
Below are methods you can incorporate into your daily financial routine to improve your credit score:
Always pay bills on time and in full
Pay off outstanding debt
Avoid using more than 30% of your available revolving credit limits
Only apply for new credit when you absolutely need it
Regularly review your credit report for errors or signs of fraud
Consider credit building products if you're rebuilding or establishing credit
Find the Right Mortgage for You
Personal finance essentially boils down to finding the right solutions for your unique financial position. The same is true for mortgages. Whether your credit is excellent or poor, do your best to find a mortgage product that works the best for your circumstances. Be patient, as this can take time. A mortgage is a serious commitment, so you should think about and review your options carefully.
After obtaining your mortgage, a possibility down the road is to refinance it. If your credit score and overall financial situation have improved, refinancing your mortgage can lead to a lower rate. A lower rate will ultimately lead to more money for you.
The bottom line is that credit scores are important for obtaining a mortgage because they influence whether you will qualify for competitive interest rates. Mortgages are likely the largest financial commitment you will manage in your whole life. Having decent credit will make the mortgage commitment easier to handle.