How Does Your Credit Score Affect Your Mortgage?

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When purchasing a home and applying for a mortgage, one of the most important factors your bank considers is your credit score. This number can make you ineligible to purchase a home or it may help you save some money during this large transaction.

What is a Credit Score?

Your credit score is a combination of your financial decisions. This three-digit number is comprised of many factors such as:

The types of credit you currently possess
The length of time you’ve had accounts opened
Your current debt
Your payment history
If you’ve recently had any credit inquiries

Your credit score will range from 300 to 900. The higher the score, the more confident banks are that the money you borrow will be paid back. Based on poor financial decisions, lower scores mean you are a higher risk.

How Does Your Credit Score Affect Your Mortgage?

Your credit score plays a critical role in your mortgage. If your credit score is too low, banks may be wary to approve the financing. If they do approve your loan application with a poor score, you can expect a high-interest rate. This will cost you significantly over the course of the loan.

For example, if you choose to borrow $500,000 with a 3.0% interest rate for 15 years, you can expect to pay up to $121,000 in interest. For that same loan, if your interest rate is increased to 3.5%, you will pay $143,000 in interest. That is a difference in $22,000.

Additionally, your credit score can affect where you receive the financing to purchase a home. The better your credit score, the more banks will be inclined to work with you. More banks equal more options to shop around to find an ideal rate. You want a score greater than 700 to purchase a home. If so, you will be able to apply for a home loan at most mortgage companies, credit unions, and banks.

What if I Have a Poor Score?

If your credit score is low, it may be in your best interest to wait and purchase a home until you can improve it. Luckily, there are several ways you can boost your score. A few tips to improving your credit score include:

Pay all bills on time and in full each month.
Do not use more than 35% of your available credit.
Keep credit lines open and active.
Pay off as much debt as possible.
Do not open numerous credit lines in a short period of time.

Keep in mind that it will take some time to build your credit and it is not something that you can change overnight.

When purchasing a home, you must prepare yourself financially and make strong financial decisions. This will not only help you save money, but it will improve your credit score as well.

At Knowledge Broker, our goal is to create an open-source of information for all our clients. We want to ensure that, at the end of the day, they get exactly what they want and what they need. If you know someone who could use our help or services please put them in touch with us or send us their details using the contact information below. And before you go, click here to take the Knowledge Broker Quiz and see exactly what we can do for you!

JOSHUA CAMPBELL (@knowledgebrkr)
Real Estate Broker
Coldwell Banker The Real Estate Centre, Brokerage
j oshua@knowledgebroker.ca
249 Avenue Road • Newmarket, ON L3Y 1N8
289.231.0001