What You Should Know About Qualifying for a Vancouver Mortgage and Your Credit Score

September 18th, 2008 Categories: Real Estate News, Vancouver Real Estate

The Canadian banks have tightened their requirements for people wishing to buy Vancouver real estate.

Many people who have below a 620 beacon score, may have challenges finding mortgage financing in the near future. After Oct 15, at least one applicant on a high ratio mortgage application MUST have a minimum 620 beacon score at all insured lenders.

Below is a basic overview of important factors that make up a credit score, and some tips on keeping a good score or improving a low one.

The credit score is not a summary of the applicant’s credit as of today. It is actually a prediction of the applicant’s likelihood to default on a debt over the next two years. The lower the score, the more likely that client is to default in the future, and therefore, the applicant is considered a higher risk candidate for a mortgage.

The following is a break down of a credit score.

35 percent of the score is based on your payment history. A lender wants to see the score to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc.

30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25% or less of their limits.

15 percent of the score is based on the length of time you’ve had credit. The longer you’ve had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

10 percent of the score is based on the number of inquiries on your report. If you’ve applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven’t used the cards or gotten the loans). The more recent these inquiries are, the worse for your credit score. FICO scores only count inquiries from the past year.

10 percent of the score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you shouldn’t have. These actually come more into play if there isn’t as much other information on your credit report on which to base the score.

Your credit score not only affects whether or not you get a loan; it also affects how much that loan is going to cost you. As your credit score increases, your credit risk decreases. This means your interest rate decreases.

Here are just a few quick tips that’ll help you improve your credit:

Order a credit report once a year from Equifax and TransUnion:

You have to know what your scores are before you start to do anything to change them. Lenders may report different info to the two different companies. Don’t let anyone make an inquiry on your credit report unless you absolutely have to. The more inquiries, the lower your score.

Dispute errors: Look for errors in the report, such as accounts that aren’t yours, late payments that were actually paid on timedebts you paid off that are shown as outstanding, old debts that shouldn’t be reported any longer (negatives are supposed to be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years), Scrutinize your credit reports for mistakes that could hurt your credit score such as an account wrongly reported as delinquent, or credit information for someone whose name is similar to yours. Credit bureaus are required by law to investigate disputed items, usually within 30 days

Pay off credit card balances: This is one of the most effective steps you can take to boost your credit score. One of the factors used to calculate your score is “credit utilization”- your total debt relative to the total amount of credit available to you. For example your balance is 10,000 and the credit limits on all your cards total 20,000, your credit utilization is 50%,. Reducing your credit utilization will improve your credit score,

Don’t close unused accounts: Closing accounts will reduce the amount of credit you have available, thus increasing your credit utilization. You can cut up your credit cards, but don’t close the accounts. Closing unused accounts without paying down your debt changes your utilization ratio, which is the amount of your total debt divided by your total available credit. It doesn’t mean people shouldn’t close them, but don’t close them to improve your score. If you do cut up cards, though, leave the oldest one open. The length of your credit history is another factor in your score. If you close the account of the credit card you got when you were a freshman in college and leave open the ones you just got within the last couple years, it makes you look like a much newer borrower, The ratio of your debt to your credit limit is more critical, so closing old accounts only raises that ratio which you don’t want to do. So don’t close old credit card accounts just because you’re not using them. Creditors also now look at the average age of your accounts so, again, keep those old accounts

Don’t Open new accounts: Opening new accounts is viewed as a sign that “you’re in financial trouble and looking for credit”. Opening new credit cards will lower the average age of the accounts in your credit report. That could reduce the portion of your score that calculates how long you’ve been using credit

Working with credit card balances: Transfer balances from a card that’s close to being maxed out to other cards to even out your usage, Try to get the usage on all of them at 20 to 30 percent instead of a bunch at zero and one at 80 percent

Hopefully these simple tips will help you maintain and improve you credit rating,

If you are interested in attending one of our detailed credit presentation please contact Mortgage Consultant, Alma Pasic, for upcoming dates and times. alma@wealthwiz.ca

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