Credit and Mortgages

Credit and Mortgage Qualification

Before approving a mortgage, lenders will want to see how well you have paid your debts and bills in the past. To do this, they consider your credit history (credit report) from a credit bureau. This tells them about your financial past and how you have used credit. Before looking for a mortgage lender, get a copy of your own credit history and examine it to make sure the information is complete and accurate.

What is a Credit Report?
What is Reported on your Credit Report?
What is a Credit Score?
How to Improve Your Credit Score in Order to Get a Mortgage
Self Assessment - How's Your Credit
More Resources on Credit
Return to 'Can You Get a Mortgage' Overview

What is a Credit Report?

A credit report is a history of how consistently you meet your financial obligations. A credit report is created when you first borrow money or apply for credit. On a regular basis, the companies that lend money or issue credit cards to you (banks, finance companies, credit unions, retailers, cell providers, etc.) send to the credit reporting agencies or bureaus (Equifax and TransUnion) specific and (hopefully) factual information about their financial relationship with you, including when you opened the account and if you make your payments on time, miss payments or have gone over your credit limit. Credit bureaus receive this information directly from the financial and retail institutions and retain it to help other lenders make decisions about granting you credit. Your credit report is a history that will help lenders determine what kind of lending risk you are and if you are likely to repay your obligation on time.

In Canada, most provinces have credit reporting legislation to outline practices that must be adopted by credit reporting agencies and the users of consumer credit information to protect the rights of consumers.

It is important to understand that a credit reporting agency like Equifax is simply a records keeper - they only report what credit issuers submit to them, and mistakes can and do happen. The main point that I like to stress is that the both the credit reporting agencies and the credit issuers are required by law to report the truth, whatever that happens to be.

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What is Reported on Your Credit Report?

Below is a list of the major sections found in a credit report.

Personal identification: Name, address, date of birth and Social Insurance Number (SIN).
Consumer statement: Allows the consumer to add a brief comment about any information in the report.
Credit information: Details of credit accounts, transactions and history of late payments.
Public record information: Secured loans, bankruptcies and/or judgments.
Third-party collections: Any involvement with a collection agency trying to collect on a debt.
Inquiries: All organizations or individuals that have requested a copy of the credit report in the past three years.

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What is a Credit Score?

Your credit score, also referred to as a “FICO score” after the mathematical formula created by Fair, Issac and Company or a "Beacon Score" by Equifax, is a statistical formula that translates personal information from your credit report and other sources into a three-digit score. The credit score is used by most companies as a quick way to decide if the applicant is a good credit risk or not. Equifax and TransUnion will calculate the numbers from the credit report and generate a number between 300 and 900. A low score indicates a bad risk. A score of - say - 700 or more puts the applicant in the lenders’ good books. Most "A" lenders want to see a a primary applicant with a credit score of at least 650 to 680.

Here is an illustration of how your score might be calculated:

Factor	Weight	Points
Payment History Bankruptcies, late payments, past due accounts and wage attachments, collections, judgments - none is better	35%	315
Amounts Owed Amount owed on accounts, proportion of balance to total credit limit - moderate use is best, maxed out hurts your score.	30%	270
Length of Credit History Time since accounts opened, time since account activity - active and long time user is best	15%	135
New Credit Number of recent credit inquiries, number of recently opened accounts - less is best	10%	90
Types of Credit Number of various types of accounts (credit cards, retail cards, mortgage) - variety is good	10%	90
Potential Totals	100%	900

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How to Improve Your Credit Score in Order to Get a Mortgage

As a mortgage broker, I constantly talk to clients, especially young people trying to get a mortgage to buy their first home, only to discover they don't have any credit history established or the credit history they do have is insufficient or tarnished. It takes time and effort to create or mend your credit score, so start early.

It is assumed that most of us cannot afford to pay cash for a home, so a mortgage become necessary to raise the appropriate amount of funds for a purchase. Credit Score is a major determining factor in lenders deciding whether you get the best mortgage rate or a REJECTED on your mortgage application. If you are preparing to buy a new home or re-mortgage, here are a few tips to make sure your credit score supports your financing plans.

1. A person needs active trade lines to get a credit score. Trade lines can be credit cards, lines of credit, loans, car leases etc. Rent and paying utility bills does not show up on your credit bureau (unless you don't pay!) so they don't create or increase your score!

Here's the simple truth - you must borrow and repay to create a history of your healthy debt repayment habits! Use the credit you have regularly to establish and/or maintain a credit history. For example, use your credit card for gas, groceries, or one small purchase every month and pay it off every month <-that's good! Having no credit history diminishes trustworthiness in eyes of the credit bureau <-that's bad! Avoid opening accounts without intention of using them.

2. Obtain at least 2 trade lines (credit cards, loan, etc) with at least $2500 maximum limit between them. Under $2500, the lender may not take the credit card activity seriously. Consider a credit card only for use at a grocery store or a gas card if you are worried about over spending.

3. Pay bills on time as agreed. Late, missed and unpaid bills lower your score, even if one day late. Set up automatic payment and overdraft protection on your bank account so that you never miss or bounce a payment. (Paying one day late is NOT paying as agreed!)

4. Think twice about allowing someone to credit check you...multiple checks lowers your score...makes you look like you NEED money. Not to mention, not all credit checks are equal – “B” lenders (say a pay-day-loan) may drop your score more than “A” lenders!

5. Never max credit cards etc...stay below 50% of card limit for the best score and below 75% for next best score. High relative balances lower your score. Going over your limit is a score killer! Don't spend what you haven't already earned and pay off your high balances as they will also impact the amount of mortgage for which you can qualify and your score!

6. Finally, treat your credit like an asset which can maximize your buying power.

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Credit Self Assessment

In this section, we quickly review what things lenders are looking for to approve your credit, and things that might create problems. If you want to keep score, grab a piece of paper and a pencil and note the number of Probably OKs and how many Potential Problems. After this section, there are More Resources which you can explore further.

To perform the following self-review for Credit, note how many Probably OKs and how many Potential Problems

Your credit is probably OK for a mortgage if...

You pay your bills, credit cards, and loans on time, and no worse than 30 days late on rare occasion.
You have had credit extended to you from at least two different companies (2 credit cards, or a credit card and a car loan, for example) for at least two years.
Your balances relative to limits are modest (not maxed).
You are new to Canada (or a young adult) and can prove you have paid your bills on time for the last 12 months via reference letters from landlord, utility companies, insurance, cell phone, bank reference letter, etc., even if you don’t have much credit established on your credit report.
You had a bankruptcy or consumer proposal that was discharged over two years ago, and you have taken steps to re-establish your credit for at least 12 months since and there have been no further credit hiccups / late payments.
The bad stuff (from when you were young and foolish!) happened more than 6 years ago, as it will no longer show up on your credit report (in most cases).
Your credit score is above 650
Your credit score is above 600 and you have a good co-signor.
You have 25% or more down payment / equity, regardless of credit score.

# Probably OKs?______

There might be a problem with your credit if...

You have active collections or written-off accounts, including cell phone company disputes.
You have unpaid judgments against you.
You have unpaid collections, or recently paid collections (within last 3 to 6 months).
You have any late payments in excess of 60 days in the last two years, without a really good reason.
You don’t have any active credit in your name and had past credit difficulties.
You pay cash for everything.
You have applied for credit everywhere you can.
You are close to or over your credit limits.
You have multiple credit cards / credit lines and loans all with high balances.
You have been in Canada for more than 5 years without establishing credit.
You had a bankruptcy that is not yet discharged or discharged within the last 2 years.
You had a consumer proposal that is not yet discharged or discharged within last 1 year.
You had a foreclosure or a 2nd bankruptcy.
You haven’t (re-)established a credit rating with at least two forms of active credit for 24 months.
You paid your collections and bad accounts, but they are yet to show as paid in full or settled with zero balances on your credit report (happens all the time).*
You recently paid collections just because you want to get a mortgage.
Your credit score is under 630 and you don’t have 10% down payment.
Your credit score is under 600 and you don’t have at least 25% down payment.

# Potential Problems?______

To qualify for a mortgage today you should have:

Credit: 2 or more OKs, and no potential problems

It is important to know that there are many mortgage lenders and each lender publishes specific guidelines as to what credit score or history is acceptable to them. While one lender might say no, another might say okay. A mortgage broker can help identify and short-list which lenders are more favourable than others for your situation.

You can obtain a copy of your credit report here. You are welcome to review your report and any questions with us. Just schedule a call.