Between rising interest rates and tougher borrowing requirements, 2018 is the toughest year in ages for people seeking a mortgage.
Here’s a tip on how to improve your chances of getting the mortgage you want in this challenging environment for borrowers: Manage your credit profile intelligently. There’s more to this than having a high credit score. In fact, some steps should be considered years before you intend to buy a house.
Veteran mortgage broker David Larock says lenders typically prefer a credit score of 700, though they may in some cases accept 680 or, in limited cases, set 720 as a threshold. At 650 or thereabouts, you might get your mortgage if you can provide explanations for any credit issues you have. “A score of 620 is a hard stop,” Mr. Larock said.
Ben Sammut of Mortgage Architects said extra high credit scores used to impress lenders enough to bend the rules a bit. “Before when we used to bring a client to [a lender] with, say, an 840, the bank would just gawk at that and say, oh my goodness, that’s amazing, we’ll do everything we can for that client,” he said.
For example, Mr. Sammut said, a lender might have approved loans for applicants with exceptional credit scores even if their total debt service ratios (the share of your income needed to pay all your debts) were a little too high. Today, limits are rigid and high credit scores don’t change that.
Credit scores and, in some cases, your more comprehensive credit file, are widely available at no cost to customers of several of the big banks and credit-card companies, from online lenders such as Borrowell and services such as Ratehub.ca and Credit Karma Canada. If you find your score is below 680, here’s some information that can help you improve your standing.
The two most important factors in determining your credit score are your payment history and your borrowing history, which look at all the debt you’ve taken on and whether you made payments on time.
Late payments on your debt hurt your payment history, but being 30 days late is a lot less bad than being three months overdue. Making minimum card payments can be a bad plan because it will take ages to get your balance to zero, but at least you’ll be considered as making payments on time.
Two to three years is a good time frame for polishing up your credit profile before buying a home. If you’ve never borrowed money or had a credit card, you’ll need this period to establish a pattern of reliably paying on time.
Mortgage agent Mike Bricknell of CanWise Financial said he finds lenders are paying close attention to recent late payments and other negatives that may appear in a mortgage applicant’s credit file. “If there are glitches in the last two years, they really dig in,” he said. Lenders may ask for an explanation for a particular glitch and possibly limit the amount of money they’re willing to lend.
Make your debt payments on time without fail in the years before you apply for a mortgage, and don’t max out your cards. Mr. Bricknell said lenders prefer clients who use 85 per cent or less of the borrowing room on their credit card and line of credit.
Mr. Bricknell said that if you have a credit score on the modest side – say in the mid- to lower-600 range – you might be OK if your partner has a good score. He said people with lower scores should also expect their lender to pay attention to their Bankruptcy Navigator Index, a service offered to lenders by the credit monitoring agency Equifax to help them identify bankruptcy risks.
Equifax says that credit scores predict the likelihood that someone will pay what they owe on time. However, experience shows many people who declare bankruptcy continued to make payments right up until they became insolvent. The index may also indicate that someone with a credit score just below the cutoff is still a good credit risk because they are less likely to go bankrupt.
Rising mortgage rates are something you can’t do anything about as a mortgage applicant, and the same goes for tighter regulations such as the mortgage rate stress tests for borrowers that were introduced over the past 24 months. Improving your credit profile is definitely in your control, especially if you start the process well before you start looking for a house.
Rob Carrick