Understanding Credit Scores and Their Importance for Mortgages

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Your credit score is a critical factor when applying for a mortgage. Lenders use your credit score to assess your creditworthiness and determine the risk of lending to you. Here's a detailed explanation of credit scores and their significance for your mortgage application:

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What Is a Credit Score?

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• Your credit score is a numerical representation of your creditworthiness, reflecting your past financial behavior in terms of repaying debts.

• In Canada, Equifax and TransUnion are the two main credit bureaus responsible for producing and compiling credit scores.

• Your credit score falls within a range typically from 300 to 900, depending on the bureau, with higher scores indicating better creditworthiness.

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Why Is Your Credit Score Important for Your Mortgage?

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• Lenders use your credit score to assess your ability to repay a mortgage on time.

• A high credit score can provide several advantages, including better interest rates on conventional mortgages, more lender and product options, and increased likelihood of mortgage approval.

• Your credit score impacts your borrowing capacity, which means you might qualify for a higher mortgage amount with a higher score.

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Types of Credit Scores and Mortgage Lender Usage:

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• Credit bureaus calculate scores using mathematical formulas, such as FICO or Pinnacle scores, which range from 300 to 900.

• Mortgage lenders primarily use your FICO score for application approval, which might differ from the score you see on your credit bureau report.

• While a lower FICO score doesn't necessarily lead to mortgage rejection, it could affect the rate or conditions of your mortgage.

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Accessing Your Credit Score:

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• Equifax and TransUnion are required by law to provide you with a free credit report in Canada.

• These bureaus also offer paid subscriptions or apps that provide anytime-access to your credit score and additional identity theft protection benefits.

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Factors Impacting Your Credit Score: Your credit score is influenced by various factors:

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1. Past Performance (35%): Timely payments and a clean history with minimal judgments, liens, or collections have a positive impact. Recent late payments are weighed more heavily than older ones.

2. Outstanding Debt/Credit Utilization (30%): Maintaining low balances on credit cards and not exceeding 60% of available credit can positively impact your score.

3. Credit History (15%): A longer history of open and well-managed credit accounts is beneficial.

4. Types of Credit in Use (10%): Finance company accounts may score lower, and deferred payment options can be viewed as potential risks.

5. Inquiries (10%): Multiple inquiries in a short period may suggest "shopping for credit" and can affect your score.

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Improving or Repairing Your Credit Score:

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• Paying bills on time is essential for maintaining a good score.

• Keep credit card balances low, aiming to use no more than 60% of your available credit.

• Apply for new credit accounts only when necessary, as multiple applications in a short period can lower your score.

• Pay off debt instead of transferring it, and avoid closing unused credit cards.

• Regularly review your credit report to ensure its accuracy and dispute any errors.

• Seek professional advice or debt consolidation assistance if necessary to improve your credit.

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Re-Establishing Credit After Bankruptcy:

• Bankruptcy has significant consequences and remains on your credit report for at least six years.

• It can be challenging to re-establish credit, but securing a secured credit card that reports to credit bureaus can be a helpful step.

• After bankruptcy, it's crucial to demonstrate responsible credit use by making payments on time.

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When Is Your Credit Pulled for a Mortgage?

• A hard credit check is required for your mortgage pre-approval, which temporarily affects your credit score.

• Pre-approval allows lenders to shop for the best mortgage rate and product and secure your rate for up to 120 days, depending on the lender.

• Your credit won't be accessed until you provide consent.

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Maintaining a good credit score is essential for securing favorable mortgage terms and potentially saving thousands of dollars. I  can offer guidance on improving your credit score and help you find the best mortgage rates and products tailored to your financial situation.