There's one number that's a catch-all representation of your financial status.
Your credit score.
While the majority of people understand the basics of what a credit score is, it can be very confusing to figure out what exactly this number means for you in your quest for getting qualified for a mortgage.
One of the biggest obstacles in getting a loan approval is a low credit score. However, you can easily get approval with a little preparation and understanding of the effects your credit score will have on your mortgage application.
What is a Credit Score?
Your credit score is the numerical representation of your "creditworthiness" – in other words, it tells lenders how much of a "risk" they'll be taking on if they loan you money. For this reason, the better your credit score, the better your chances of getting approved for a mortgage loan.
Typically, a score of 650 is fair; scores above that number are excellent, but scores that fall below it can lower your chances of getting a loan approval.
You can find out your credit score, but the number alone will not give you a comprehensive understanding of your financial standing. You'll need to obtain a full credit report in order to see why you received that score result.
What is a Credit Report?
A credit report is a detailed report of your credit history. So while it will give you your credit score, it will also show all of the negative and positive variables that are used to calculate your total score. There are several rating agencies used when calculating your score. Depending on where you apply for your loan, the company may use one agency or they may use an average of the agencies.
Your entire credit report gives lenders a good idea of your financial history, so they're able to assume your ability to make mortgage payments on time.
Some people find out about a low credit score once they apply for a loan. This is an issue because it takes time to improve your score. The good news is that there are ways to quickly improve your score to get approval. The best way to build a credit score is to borrow money and pay it back on time.
Why Does My Credit Score Matter?
Your credit score directly affects lending decisions. To obtain a mortgage loan, most lenders prefer that your total debt service ratio is less than 40% of your income. This shows lenders you'd be able to comfortably pay your mortgage payments. For this same reason, your payment history is very important; it shows lenders your payment habits.
The good news with new home construction is that many construction companies have preferred lenders they work with. Choosing this option can make it easier for you to understand your housing options and move forward with the process since they're experienced in mortgages for new home construction. They can also help you understand mortgage mistakes and how to avoid them.
How Can I Get a Loan Approval?
With the strong housing market in Calgary, many people are trying to purchase a home before home prices increase even more. Recently, the process of obtaining a mortgage has changed slightly due to new mortgage laws. Still, to get the lowest interest rate possible, you need to make sure to bring a high credit score with your application.
Getting a loan is possible even with a low score, though. Buyers just need to be prepared to execute a plan for improving their score quickly. Working with a quality home builder can help solve a lot of these issues in the beginning. Additionally, many mortgage companies will work with you on a plan to improve your score.
How Can I Improve My Score?
Anyone who has a low credit score probably has negative marks on their credit report. When reading your credit report, you will be able to see your spending and repayment history.
You need to read through your credit report and find where the negative marks are coming from. For a lot of people, the negative marks come from a past bill they may not have even known about.
Even an old utility bill left unpaid can cause a major issue on your report. There are several options at this point. You can call and try to negotiate the bill with the company you owe money to. This is typically the best way to clear the debt from your report.
If you have a major negative mark from something like a foreclosure or a bankruptcy, the best way for you to improve your score is to wait. Time is the best cure for a bad credit report if you're borrowing money and paying it back on time.
If you simply lack a strong credit history because you haven't used credit, you should take on a loan or other debt and pay it back over time. One of the biggest variables in your credit score is the number of accounts that you have open. The more accounts you have open, the more chances you'll have to increase your score.
Getting a home loan is possible if you're prepared for the process.
You need to understand your credit score and carefully read your credit report before you decide to apply for any financing. The more you prepare before applying for a loan, the higher your chances of getting approved at a great interest rate.