The Greater Toronto Area is an increasingly popular region for Canadians to live because of the lucrative job opportunities and desirable neighbourhoods. Unfortunately, this has made the housing market in the area boom and become extremely expensive. Due to the high cost, it can be challenging for a typical Canadian consumer to get approved for a mortgage in the GTA.
Whether or not you get approved for a mortgage in the GTA has a lot to do with your credit score, among other factors such as your employment status and debt levels. To better your odds of getting approved for a mortgage, it is helpful to understand how your credit score is calculated, why your credit score is so important, and how you can improve your credit.
How are credit scores calculated?
A credit score is a three-digit number used by financial institutions, creditors, and lenders to quickly assess your creditworthiness. A consumer with good creditworthiness is more likely to repay their debt on time which is something lenders are obviously concerned with. Credit scores range
from 300 to 900, the higher your score, the better. There are two major credit bureaus in Canada, Equifax and TransUnion. They are the two institutions that determine your credit scores, each institution issues a separate credit score, so all consumers have two.
To grow and improve your credit, it is important to understand the factors that influence your credit score. There are five factors that influence the calculation of your credit score.
Payment history. The largest factor that impacts your credit score is payment history. When you pay creditors on time and in full, your credit score will benefit. Creditors want to know that you have been consistent and reliable with your payments in the past before extending new credit.
Utilization rates. A utilization rate is the percentage of the credit you are currently using out of your total available credit. The more debt you are currently carrying, the more challenging it can be to get approved for new credit, for example a mortgage. Lenders typically like to see your credit utilization at less than 30%.
Length of credit history. The longer you’ve been using credit the better. A credit history that is long and filled with on-time payments will positively affect your credit score. Consider keeping your oldest accounts open and active as this will help you credit history.
Inquiries. Whenever you apply for new credit, the lender or creditor will pull your credit report which results in an inquiry. A high number of inquiries can hurt your credit score because it communicates that you have applied for a lot of credit. Note that when you pull your own credit report, there will be an inquiry, but it won’t hurt your credit since it is a “soft” pull instead of a “hard” pull.
Types of credit accounts. Having a variety of different types of credit accounts in your credit report will show to future lenders that you can responsibly and effectively manage multiple types of debt.
What credit score do you need to get a mortgage in the GTA?
In the GTA, the minimum credit score you need to get approved for a mortgage is 650. While 650 is the minimum
, the higher your credit score, the better your odds are of getting approved. Having good credit is important in the GTA because of the high cost of housing. Lenders want to know that you’re creditworthy before extending such a large amount of money.
Why is your credit score so important?
Credit scores, along with income, existing debt, owned assets, and employment status, are crucial in determining whether a consumer will get approved for a mortgage. With any loan, particularly for mortgages, conventional lenders will assess all these factors. Individuals with lower credit are less likely to get approved for mortgages because it is perceived as a high-risk transaction to most lenders. A low credit score usually means that an individual has had an unreliable financial past and lenders often don’t want to take a chance on them.
How to improve your credit score
Before applying for any financing, including mortgages, it is wise to do anything you can to boost your credit score. Even if you already have a good credit score, you can still try to improve your score for the best possible odds of being approved. Below are several tips on how you can give your credit score a boost before reaching out to lenders.
Obtain a copy of your credit report. You want to know what future creditors will see and how you will be judged. Getting a copy of your credit report is the perfect way to do that. This is also a good opportunity to determine if any of the information on your credit report is inaccurate. If you do find any errors, it’s important that you contact the appropriate credit bureau to get the information fixed.
Optimize utilization rate. The lower your credit utilization rate is, the better. Before applying for a mortgage, calculate your credit utilization rate by dividing the total amount you currently owe by the total amount of credit that you have available. The sweet spot for utilization rates is 30%. Pay down what you can, especially credit cards, before applying for a mortgage.
Timely and full payments. Make payments on time and in full to give your credit score a boost. Remember, payment history is the most important factor that determines your credit score.
Secured credit cards for past issues with debt. If you have had financial troubles in the past, you may need to spend some time building your credit before applying for a mortgage. It can be challenging to get a credit card if you have had financial difficulties, so consider using a secured credit card instead. Since they are secured with a deposit, it is much easier for any consumer, regardless of past financial issues, to get approved.
Obtaining a mortgage is one of the biggest financial decisions you’ll make in your life, so it is wise to be prepared. Your first step is to see what your credit score currently is and find areas for improvement. Take the necessary steps to improve your credit score, whether it is paying off debt or being more diligent with payments. Work your way up to 650 and beyond, and in no time, your dream home will be yours.
This article was contributed by Loans Canada, the nation’s original loan search platform.