Here’s part 8 of my 10 step series on mortgages here at Financial Uproar every Wednesday. Every step of the process will be covered from the application to qualifying to tips and tricks to save money on your mortgage and everything in between. To read all of these just click on the category Mortgage Basics.
This week, we’re going to look at credit reports and the effect they have on someone’s ability to qualify for a mortgage.
What Affects Your Credit?
There are countless articles on the interweb about credit scores and what affects them, so I’m not going to spend too much time on what factors go into determining someone’s credit score.
Do you pay your bills on time? Do you have a reasonable amount of debt? Do you only have one or two credit cards? As long as you’re financially responsible, your credit report will be fine. Only those with large amounts of debt or a large number of accounts open have to worry. Credit reporting companies have complex formulas that are used to figure out credit scores. These formulas can easily be beaten by using common sense.
What Score Do You Need
As discussed in the CMHC insurance post, there are certain credit scores that a borrower needs to qualify for CMHC insurance coverage.
If a borrower has a credit score above 680, they’ll qualify for any mortgage product CMHC offers. Any credit score above 680 is considered an excellent score, at least according to CMHC. If a borrower has a credit score above 680, CMHC allows the borrower to spend up to 44% of their income on the mortgage, heat, taxes and any other debts. If the borrower’s credit score is below 680, the borrower can only go up to 42% of their income. A higher credit score can be the difference between a borrower qualifying and shivering homeless on the street.
Basically, a borrower needs a credit score of 610 to qualify for a CMHC insured mortgage. CMHC will insure a borrower that has a credit score of 580, only if that borrower is putting a large down payment of more than 20% on that mortgage.
When I was in the industry (this may have changed, correct me if I’m wrong) a borrower was pretty much screwed if they didn’t have a score of 650. Generally if a borrower has a score below 650, the lender will find some reason to decline the potential deal. If someone’s score is below 650, they’ll generally have some sort of problem with their credit report.
Let’s look at a hypothetical example.
Borrower A has a credit score in the 700s. She has a very reasonable car payment, as well as one credit card that she pays off every month. She has never been a minute late with either. She has the required down payment, as well as enough income to qualify for the mortgage she wants. Her application should be a slam dunk, right?
Not so fast, grasshopper.
It turns out that this imaginary borrower doesn’t have enough of a credit history to qualify. In order to qualify for a mortgage, a borrower needs at least two years worth of history on either a credit card or a vehicle loan.
When someone first starts using credit, the score becomes very good, very quickly. That’s because there are no issues with such an account. A lender is looking for enough history to prove that the borrower is going to use credit responsibly while they have the mortgage.
There are alternate programs for Canadians who haven’t accumulated enough credit history to qualify for a mortgage.
For new immigrants to Canada, CMHC has a special New To Canada program. The borrower must be here legally, be gainfully employed, and so on. Alternate sources of credit will be considered for this program, since the borrower doesn’t have enough time in Canada to gain the credit history needed. Possible examples of this can include rent payments or any utility payment. A year of history is needed, with only one late payment accepted.
The same program can be used by Canadians without the credit history as well. Generally lenders will ask for utility payments, or maybe a cell phone bill, since most renters don’t bother to save their receipts from their landlord. If I had a bad tenant that wanted records so they could buy a house, I’d lie through my teeth telling the lender how awesome the tenant was, just to get rid of them.
I’m so bad!
First of all, stop trying to do things to manipulate your credit report. As long as someone is responsible with credit, they have nothig to worry about.
Most Canadians just need to worry about their other debt payments when it comes to qualifying, since most pay their monthly obligations on time. One of the reasons why longer amortizations became popular is because people needed the lower payments to qualify for their mortgage, since the average Canadian has so much other debt.
If someone’s credit is bad, only time can repair it. Tricks exist to give a credit rating a little boost, but only an extended period of time without a late payment will repair someone’s credit. If someone doesn’t qualify for a mortgage because of a substandard credit score, they should probably reconsider home ownership.