How your credit score and debt ratios affect your mortgage worthiness
Lenders look at many factors when they consider an application for approval. They review your credit scores, the property that you are looking to purchase and your source of down payment just to name a few.
One of the Key factors here is your credit score. Your credit score can directly affect the mortgage interest rate a lender offers. Basically, higher credit scores can lower the interest rate, while lower scores may cause them to rise.
Your credit score is generated based on multiple variables–including your credit utilization. If you are someone who carries a balance on your credit cards month to month, in order to positively effect your credit score you would want to be at a maximum of 75% credit utilization. The key to a good credit score is to use two to three credit vehicles—either loans or credit cards. This helps build up your credit history (lenders want to see 2+ years of history). But don’t extend your credit utilization (the amount of credit you use) on any one of your credit vehicles.
If you use your credit cards and pay them off each month then this is considered more ideal as you have no additional debt to consider when reviewing your application for a mortgage. Whether your limit is 20k or 10k, it doesn’t matter if you are paying off the balance each month, which means that the limits are not as important. The limits become important when you are carrying a balance, as this impacts your debt-to-income ratio. This determines if you are able to afford the purchase. In the eyes of the lender, the debt-to-income ratio is extremely important. The lender wants to know that you make enough money each month to cover your bills and expenses.
A strong credit profile and reasonable debt ratio are equally important if you want the best mortgage rates and terms.
People tend to overly focus on the credit score. It’s important, yes, but lenders don’t stop there. They scrutinize your payment history, unpaid debts, total debt load, number of open debts and age of accounts, to name just a few. For the best mortgage options, aim for a score above 700. If your score dips below 680, if starts getting harder to qualify for the best rates and terms.
Cancelling cards isn’t great either. It reduces the average age of your accounts, and the credit bureaus prefer to see long-established accounts as mentioned above.
As for debt ratios, here’s a rule of thumb. As long as:
- Your monthly obligations are less than 39% of your monthly gross income,
- You’re buying a marketable property,
- Your credit is strong and well established and 4) your income is stable and provable, then you’ll typically qualify just fine.
“Monthly obligations” refers to your monthly debt payments, property taxes, condo fees (lenders account for ½ of condo fees in your debt ratios) and heating cost.
Working With a Mortgage Broker
It’s always a good idea to speak with a mortgage professional well before you start shopping for a home. They have industry knowledge and access to many different lenders. If you apply at your bank, you must fulfil their criteria to qualify or you are out of luck.
A mortgage broker can pull a report for you and help you to figure out who will lend to you and what you can do to improve your credit. You want to have someone on your side when you are looking for a mortgage because credit scores don’t always give you the whole picture. These mortgage professionals receive compensation from the lenders when they qualify appropriate buyers. Therefore, there is no fee for you to pay. They can help you to pre-qualify for a mortgage so when you do find something you like you aren’t faced with a surprise on your credit report or a big fat no from the lender.
Agent ReVa can help connect you to the best mortgage brokers based on your needs and preferences. Just drop in a message here. Mortgage professionals make sure that you have one less thing to worry about when you’re shopping for a home.