Question: What’s your key to happiness?
Answer: Having a place to call ‘home.’
However, with everything going around the world, housing prices have gone literally to the sky.
According to research, about 75% of Canadians aspire to become homeowners. Their dreams, however, were crushed because they couldn't afford one. The reason being:
- Insanely high housing schemes
- Unaffordable interest rates
- Demanding mortgage lenders
- Excessive and costly loan terms
Endless hurdles stop you from buying a house, applying for a mortgage, or registering for a loan scheme. However, fixing just one thing can help you join the 25% of the population who are fortunate enough to have their own home.
Wondering what it might be? Your Credit!
Yes! Having a good credit score in Canada can support you in landing an affordable, reasonably priced, and budget-friendly mortgage or home loan.
Good Credit Score = Low Mortgage Rates: Is It True?
Bingo! Yes, it is.
If your dream is to save money for a home in Canada, you must first keep your credit score above the good range. Here’s why your credit score matters for a good mortgage:
- Some lenders require a minimum credit score for mortgage eligibility
- Your credit score range will decide which loan type you can get for your home
- Low credit scores usually offer high interest and premium rates that might be too expensive for more Canadians
Most importantly, your good credit score can prove to the lenders and brokers that you have what it takes to be responsible and pay the payments timely.
Bonus: Click to read an interesting study by MoneyView on why on-time loan repayment is crucial for your credit future.
Now you know how good credit can help you get an affordable mortgage.
However, what if you belong to the poor or bad credit range? Do you have to forget your house dream and be among the 75% struggling Canadians? No! You need to take the initiative and build your credit for desired mortgage rates.
How To Build Good Credit For Low Mortgage Rate?
Image Credits: Freepik
Buying your first home is probably one of the significant financial decisions of your life. Therefore, creating a homeowner application that works in your favor and not against your dream is more important. Here’s how you can build one:
1. Maintain Error-Free Credit Report
Your credit report should be the epitome of perfection. It must show accurate information about your financial condition.
However, sometimes, it can turn even a good application into a faulty one.
Review your credit history to know where you stand. However, the best time to do this is at least months before your mortgage application.
- It can help you fix the credit report mistakes that might otherwise hurt your credit score
- It will provide you with enough time to improve credit score and build a new and better credit history
Even if you currently have bad credit, pulling a credit report check earlier can help you put yourself on the track so that you can work to create a better credit history.
2. Get Rid Of Your Existing Debt
Image Credits: Freepik
Your existing debt balance is already hurting your score, so why let it also drag down your mortgage application?
If you want to build your credit for a mortgage, you must clear your debt payments. Only then your credit score will be good enough to help you get low premium rates.
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Plan the payments: Another perk of checking credit earlier is that it will help you analyze how much you owe and what payments you need to make to pay off your debt before your mortgage application
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Follow the debt snowball strategy: Try to clear all of your small debts one by one to have a payment flow. It can help you get ready to clear the larger bills
Credit-Boosting Bonus Tip
According to Forbes Advisor, a debt snowball strategy can aid the consumer in building the momentum to decrease and then finally clear the debt.
3. Keep Your DTI Low For A Low-Interest Mortgage Plan
Your low DTI is your key to happiness, aka your home!
DTI or debt-to-income ratio is an average of what you earn and what you owe. For instance, your monthly (pre-tax) income is $10k. After paying all your debt payments, you’re left with $5k, which makes your DTI 50%.
Now, this is a Red Alert for brokers and lenders as half of your income is already budgeted for something.
How is DTI related to your credit score?
- If you have a high DTI, you’re more likely to fall behind in paying your credit balance in full
- So, if you avoid consecutive two or three credit payments, it will take a toll on your credit score and thus on your mortgage application
Moreover, low DTI and high credit scores are considered a complete package for a low-interest and highly affordable mortgage plan.
Note: Your debt-to-income ratio doesn’t directly impact the credit as your credit report doesn't involve the earning details.
However, your lender usually calculates the DTI by comparing score, debt, and provided income to give your mortgage application a ‘good or bad’ status.
4. Be Open-Minded About Credit-Builder Loans
If you want fast credit-improving results to apply for your mortgage, getting a credit-builder loan can help your case.
“A credit builder loan is a type of mortgage to help build your credit!”
The lender submits the money into an account as ‘collateral’ which you can use after the complete repayment.
As per CNBC reports, a credit-builder loan can actually be a good idea if you want to save money for the down payment and build your score for the mortgage.
Yes, you can get a credit rebuilding loan to notice a change in your credit reporting. But, how can you know whether or not getting a credit builder loan is a right choice for you or not?
- Your payments for the credit-builder loan are usually reported to the top credit bureaus to let them know about your creditworthiness
- Timely credit loan payments will help you build a stable credit payment history
A typical credit building loan has a minimum sixth payment installment period which works well if you want to improve your credit in a short time.
5. Get A Credit Building Credit Card
Yes, they do exist!
If you want to build your credit for a reasonable mortgage rate, you need to get a credit card that’s easy to manage.
A card that offers to check credit score quickly or something that pays you back for every dollar you spend. Yes, we are talking about a secured credit card!
- A secured Visa card usually has a low-interest rate that’s easy to manage if you’re struggling with debt
- You can use the card to make smaller everyday payments, thus working towards building a responsible credit history
It doesn’t matter if you’re working on your credit to get your first or third mortgage loan. What’s important is that you’re trying to get this one on better terms and conditions.
6. Give A Shot To Authorized User Strategy
If you can’t think of anything to build your credit quickly, becoming an authorized user can be a good idea.
You can get help from a relative, friend, or family member to let you benefit from their good credit history.
- Your account will have the primary account holders' good credit history. So, lenders will have a better impression of your credit score. (However, it will work only if the information of the primary account is reported to the bureaus)
However, make sure that the primary account you choose is the epitome of perfection. They must have a good credit history, excellent credit score, and low credit utilization ratio.
One thing to consider here is that, although becoming an authorized user is a great credit building tip, it can also have some drawbacks:
- You might lose control of your account. Yes, you can make the transactions and payments, but you won’t be able to apply for a credit limit increase as per your spending
- Also, if you’re benefiting from the good credit score of the account, you must also prepare for their bad credit decisions
So, it’s necessary to think through everything and choose the account you know has a good credit reputation.
Bottom Line
Building a dream house motivates most of us to keep earning and saving. However, despite doing so all our lives, we still fail to manage the finances and decide to get a mortgage loan instead.
And, if you’re residing in Canada, even getting a mortgage can become a dream.
So, read this guide to get your credit ready for the application and ensure that you don’t get rejected because of your bad score!
