How Your Credit Score Affects Your Mortgage Approval

The single most important barrier to getting a mortgage approval is your individual credit score. While financial literacy is only now being taught in schools, for most adults trying to navigate the world of debt repayment, we’ve had to rely on our own self education. Before we discuss ways to improve your credit score in order to achieve mortgage approval success, let’s do a quick summary of the basics:

What is a credit score and how is it calculated?

A credit score is numerical representation of the information on your credit report. It is calculated based on the credit that has been given to you by lenders, how much of it you are actually using, and your repayment history. Other factors that can affect your credit score is the frequency of which you are seeking credit from lenders, how long you’ve had this credit extended to you, and sometimes the type of credit. Credit scores may differ depending on the credit bureau reporting the scores (they all have different scoring models) and sometimes lenders may also use a blended score from these 3 major credit bureaus.

What is a good credit score?

Depending on the scoring model, an approximate score of 750 and higher would be labelled as an Excellent credit score – this is where 57% of all Canadians rank. A Very Good rating would be somewhere in the low to mid 700s, again depending on what credit bureau is providing the score. 14% of all Canadians are in this category. 

Anyone with a score of 700+ should have no issues with getting a mortgage approval, however if your score is less than 700, then this may affect your ability to qualify, affecting either the total amount that you’re qualified for, the rate that you’re approved for, or an approval altogether, depending on what your actual score is. 

If you are looking to move, here are 9 tips to help you improve your credit score, to help with obtaining that mortgage approval:

1. Check Your Score – there are many programs and websites that allow you to obtain your own report (some free and some charge a nominal fee). Note that performing an inquiry on yourself does not affect your credit score, but be careful that the program that you are using is not associated with a lender which WILL affect your score. Check for errors and outdated information. It can take a long time for these details to be corrected or updated so notify the credit bureau immediately if you find anything amiss.
2. Pay Down Your Balance – ideally you would want to be at 30% of credit utilization for your credit cards. Creating “available credit” room will help in lowering your overall score.
3. Make Regular Payments – paying the minimal balance is so crucial in maximizing your credit score. Setup automatic regular payments from your bank account. Even if you can’t pay off the entire balance, make bi-weekly or weekly payments so you are not just relying on the one-time monthly payment that might get missed, and negatively impact your score.
4. Stop Applying for Credit – every credit inquiry reduces your overall credit score. If your current credit needs are not enough, think about increasing the limit on an existing credit facility or get a line of credit which will allow you to consolidate smaller debts and give you more flexibility for future credit needs.
5. Don’t Close Accounts – people think that getting rid of credit cards you no longer use will help improve your score but it actually does the opposite. Fewer or no credit at all will actually give you a lower or no score. So even if you are not using certain cards, don’t go closing them all just yet.
6. Use Different Kinds of Credit – think about varying the types of loans you are getting – having a variety (and not just all credit cards) will help to improve your score.
7. Accept a Credit Limit Increase – often times, you may decline your bank’s offer to increase your credit limit, but next time think about saying yes, even if your current limit is plenty. Again, contributes to the “available credit” that you have extended to you and lowers your credit utilization percentage.
8. Get an RRSP Loan – this will help you not only diversify your credit portfolio, but may also help you from both tax and savings perspectives. The idea is also being able to pay off the RRSP loan in a shorter time frame, with your tax return, which will boost your score.
9. Talk to an Expert – financial planners, mortgage brokers, debt consolidators – these are all experts who can help look at your overall financial situation and advise you on how to improve/repair your credit score if you’re not amongst the estimated 70%+ Canadians who have credit scores that are what mortgage lenders are looking for when it comes to mortgage approvals. 

These tips to boost your credit score do not affect your score overnight but with a little patience and diligence, you will see improvements in your rating, resulting in an easier mortgage approval at the best rate.