Credit is one of the most important factors banks consider in reviewing mortgage applications. Yet many potential homeowners do not grasp the basics of credit, as well as the role bad credit can play in their future. In this article, we present the basic factors of credit so that you can powerfully use your credit to your advantage.
Credit – What Every Homeowner Needs to Know
Your credit score – also called a beacon score – provides an image of your financial habits and patterns, so that the lender can understand whether or not you are capable of handling a loan or mortgage. In other words: a credit score is your financial reputation about repaying debts. The quality of credit a person has determines the following factors:
- the amount able to be borrowed
- for what purpose
- for how long
- and at what interest rates
What It Means to Have Bad Credit
If you have bad credit in Canada, it means there is a documented history of you being unable to repay your debts fully or in a timely fashion in Canada. However, it goes one step deeper – there are 3 main factors that interplay to produce your credit score. This is what determines your approval or rejection for most loans.
1. Payment History
Someone with a long history of consistently making payments on time will give lenders confidence in working with them. Being late in on your payments creates deductions on your credit score, and the more frequently you make late payments, the riskier it will seem to lenders. Credit statistics show that people with the highest ratings have not missed a payment, even when experiencing a major life trauma such as losing their job or becoming ill for an extended period of time.
2. Current Debts
You may have multiple debts – credit cards, auto loans, home loans. The more outstanding debts you have, the more likely you are to default on any one of them. Having a larger number of different kinds of debts also lowers your credit score. Lenders use the percentage borrowed of your total limit as a good indicator of how much debt you are using, preferring mortgage candidates who use less than 40% of their total limit. Look at your credit card – are you using more or less than 40% of your total credit limit?
3. Length of Credit History
The longer your credit history, the easier it is for lenders to evaluate your financial patterns. The magic number is 2 years – you should have a minimum of 2 years credit history, whether it’s your first credit card, a new start after bankruptcy, or if you are new to the country.
Mortgages and Credit
Do you wonder why sometimes banks reject one mortgage application, yet accept another with the same income and expenses? Despite any similarities, there is one fundamental difference which make banks choose one mortgage applicant over another applicant: the lenders’ confidence in your ability to repay the mortgage loan.
The 2 Essential Factors to Gaining Mortgage Lenders’ Confidence
1. Reliable Cash Flow
When the mortgage lender tries to determine your borrowing capacity, he or will look at your cash flow: how you consistently generate and spend money. As you can guess, the two essential elements here are income and expenses. The stronger your cash flow, the more the lender can trust that their mortgage loan will be repaid.
2. Credit Score
Most people accrue debts, which is often necessary to buy bog-ticket items such as a car or a home. There is nothing wrong with borrowing money – however maintaining a good credit score can sometimes be tricky. Your skillfulness at paying off your debt shows if you can be responsible for future financial obligations, such as a mortgage. As discussed above, this is the point of a credit score. Unfortunately, there is no quick fix for bad credit. Only time can heal this wound.
Worried that Your Bad Credit Could Ruin Your Chances of Home Ownership?
If you have a bad credit history in Canada, it’s a fact: the opportunities available to you from lenders will be limited. It is very likely that your low beacon score will prevent you from receiving support from banks. Once banks reject your mortgage application, the only viable option that most Canadians think is available to them, is to continue renting.
But it’s not true!
Don’t let a low beacon score prevent you from your dream of finally owning your own home. You can stop renting and own a home while you invest in it, even after banks have denied you a mortgage. That’s our mission, here at Rent to Own Home.
Time to take your Next Step:
Click Here to Pre Qualify to Own Home
