Working with a mortgage broker is a different experience than working with a bank specialist. It’s also a different part of the home buying process compared to working with your Realtor. Some people may have never worked with a mortgage broker before and don’t know what to expect. Because of that, there are some questions…Read Article
Establishing and Maintaining Good Credit
You always hear about how important it is to have good credit. But, for a lot of people, they aren’t aware of how to get there. When you’re looking to buy a home in Canada, it’s crucial that you understand the importance of establishing and maintaining good credit.
In this blog post, I’ll explain what good credit looks like to a bank and provide some of easy ways to maintain good credit once you improve your score.
Your credit score and the bank.
Generally, when seeking a mortgage, banks like to see that you have two sources of credit established for two or more years. These forms of credit should also be ones that have been used consistently. This shows the bank that you make payments regularly and on time.
An example of a great scenario would be to have a credit card with at least a $2,000 limit as well as a car loan or another type of loan that has monthly payments. It doesn’t necessarily have to be a credit card and a loan, but this is a very good combo that helps establish and build credit very fast.
Banks do put more weight on having a credit source you control the balance on such as a credit card though, so the first and most important source of credit to establish is a credit card or line of credit.
It is possible to get approved for a mortgage with less than two years worth of credit if you have a solid repayment history. This can happen with higher limits on your credit such as a loan that is $20,000 or higher and a credit card ranging from $5,000 to $10,000.
The best thing to remember is that the higher the credit limit the better. When you pay off credit with a higher limit, it looks better than maxing out at $500 every month and having no more available credit.
Banks will want your credit score to be between 620-650 or above when getting approved for a mortgage. But, it’s recommended to have 680 or above when applying for a mortgage. Banks also pay attention to whether or not you have ‘thin credit’, which is a credit card with a $500 limit and that’s all the credit you have. They will also put into consideration whether you have any collections in your name.
Need to improve your credit?
Now that you know what a bank is looking for when it comes to credit, is your score where you need it to be?
When needing to improve your credit, credit cards, loans and lines of credit are the only items that will actually improve your credit score. Bills such as internet and other monthly bills do not help at all. Even though you’re making monthly payments on these bills, the companies you’re paying don’t report to credit agencies unless you’re late. And when that happens, it only impacts your credit in a negative way.
Most mortgages report to your credit bureau now whereas several years ago most did not. One way you can guarantee credit using your mortgage is to set up a “Home Equity Line Of Credit” against your home, also known as HELOC in the industry.
So, here are your actionable steps for improving your credit:
- Get approved for two sources of credit (credit card or line of credit being most valuable)
- Pay off these sources of credit every month (or even weekly)
- Never miss a payment
- Continue this for ideally one to two years prior to wanting to receive a mortgage
Maintaining your credit score.
As we just mentioned, it’s important to pay off your sources of credit every month. When people come to me who have just been approved for a credit card with a limit of $500, I suggest they pay it off weekly.
The more you pay off credit on a smaller credit limit, the better it will be. Being at the max of your credit isn’t ideal or a good thing as this could hurt your score instead of helping it at the start.
So, paying off your card and keeping the balance at $0 will help the banks up your limit.
When the source of your credit calls you asking if you’d like to increase your credit limit, say yes. Always say yes. I know it may seem scary to have $15,000 worth of credit available, but it’s going to do wonders for you in the long run. All you have to focus on is keeping your balance at $0 and never missing a payment.
Consider how this looks:
- A credit card with a $500 limit maxed out every month.
- A credit card with a $15,000 limit having $500 on it monthly and paid off on time.
Getting a mortgage once your credit is improved.
I hope this information helps you prepare to purchase your dream home. If you have any more questions about establishing good credit and maintaining it, I’m happy to answer them. Please give me a call or fill out the form below.