Find Out How Your Credit Score Can Affect Your Mortgage Rate
Your credit score plays a vital role in qualifying for a mortgage and also in determining how much money you will pay over the term. A high score ensures that you will be able to get the best rate but also, that you will pay less overall. With the interest rates increasing and the stress test making it difficult for first time homebuyers to buy a house, it is in your best interest to ensure you have a higher score. However, many first time buyers may not be aware of the many aspects of a credit score. Here is our break down of a credit report, credit score, and a credit rating, and some tips on how to increase your credit score.
Credit Report
A credit report is a summary of your credit history. The report encompasses your entire credit history (in the last 6 years) from borrowing money to credit card record. Your credit report is important to get any kind of loan as it assess how you manage your financial responsibilities and determines your ability to obtain credit. To get a copy of your credit report, click here.
Credit Rating
At the end of your credit history, an agency will report a rating which consists of a letter and a number. This is to signify how well your credit was paid off in that term. There number is from zero to nine, ranging from new to rate to bad debt or bankruptcy. This is accompanied with a letter “R” is a revolving debt; or “I” stands for an installment account; or “O” for an open credit.
For more about the ratings and what they mean together, check this article by the Government of Canada.
Credit Score
Your credit score is an indicator about your financial health which is based off your credit report. It is the number that the lender will use to decide whether you can qualify for a credit or not. They will choose the lowest score you have to see whether you are eligible to borrow money from them. Thus, having a higher score is better as it lowers the risk you present for the lender. This number ranges from 300 to 900. CBC News claims that a number of 750 is shared by 27% of Canadians – a score which is very likely to get the loan or mortgage.
The article, “How Credit Score Affects Your Mortgage Rate” by Nerdwallet, gives a great insight into credit scores and how the score impacts your mortgage rate. . For example, let’s take a 100 point difference and see how it affects the rate:
A person looking to buy a home worth $300,000 with a 20% down payment for a 30-year fixed rate loan of $240,000.
- If this person has a credit score of 780 (a high score) – they will have a rate of 3.875% which will mean around $1,129 a month.
- If this person has a credit score of 680 (100 points less) – their rate will increase to about 4.125%, making the monthly payment to $1,163. This extra $34 a month can add up to an additional $12,240 over 30 years.
If you have already received a copy of your credit report and are not satisfied with your score, there are ways to increase it. If you are a first time homebuyer and are planning on purchasing a house some time soon, these are a few good tips on increasing your credit score:
- Always or try to pay your bills on time – as cliché as this is, it helps! Especially your cell phone bill as some phone companies may report late payment to your credit agency which could lower your score.
- If you cannot pay the full amount, make sure you at least pay the recommended amount
- Do not make many credit applications as potential lenders asking about your credit can have a negative effect on your score.
Many more tips and explanation of ways to increase your credit score can be found on our article,“Taking Measures to Improve Your Credit Score.”