There’s nothing quite like the excitement of finding a home you love and having your offer accepted. It's a wonderful feeling, but now, you've got to find a mortgage to finance the largest purchase of your life.
Finding the right mortgage includes shopping around–but it's also important to keep your credit score in tip-top shape to get the best mortgage rate available to you.
If you're thinking, "Wait a minute. What does my credit score have to do with applying for a mortgage?"—don't worry. Your credit score is a number between 300 and 900 that's calculated by one of two credit bureaus, Equifax or TransUnion. Banks and lenders use credit scores to understand how responsible you are with borrowing money.
When you're applying for a mortgage, you'll want to make sure that your credit score is in the best shape possible because it's one of the factors lenders use to determine the rate you'll receive. In Canada, an excellent credit score is anything higher than 740, but you need a credit score of at least 680 to qualify for a mortgage in Canada.
However, comparing mortgage rates could actually hurt your credit score in some cases. When you apply for a mortgage, the lender will check your credit score and report, which is called a credit inquiry. There are two types of credit inquiries:
There are two main strategies you can use to keep your credit score (and well-being) intact while shopping around for a great mortgage rate.
Getting pre-qualified and pre-approved are both helpful tools to gather mortgage quotes. Getting pre-qualified is a less rigorous process and usually only lets you know how much you could qualify for. A pre-approval, on the other hand, requires you to provide more information to the lender so it can give you a rate quote, which is typically held for 120 days.
Usually, getting pre-qualified will result in a soft check that will not impact your credit score. For pre-approvals, most lenders perform a hard check, but some only require a soft check. Double-check with the lender before going forward with either—especially if you’re early in the rate comparison process and getting rate quotes at different times.
You may be surprised to hear that credit bureaus offer some grace when you're rate shopping. If you get all of your mortgage quotes within a set time period, you can get as many mortgage rate estimates as you want with minimum damage to your credit score. This is called the “mortgage credit pull window.”
The credit bureaus will count the multiple hard inquiries as one inquiry during the time frame—which is typically from 14 to 45 days, depending on the scoring model. The time frame depends on the credit score the lender uses, and since you don’t know which score will be used by your lender, we recommend getting your quotes within two weeks.
If that seems like a short time frame, don’t sweat it. Getting pre-qualified or pre-approved usually doesn’t take long, and with today’s housing market and rate environment, you will want to lock in a rate as quickly as you can.
It’s important to protect your credit score when comparing mortgage quotes. Here’s how to improve your it during the process—or at least not lower it.
Applying for new credit, like a credit card, will result in a hard credit inquiry and lower your credit score. It's in your best interest to keep your credit score in good standing during this time, so refrain from applying for new credit until your mortgage is approved, unless absolutely necessary.
Your credit utilization is a major factor when it comes to calculating your credit score and makes up 30% of it. Your credit utilization ratio is how much credit you use compared to what's available to you. The credit bureaus recommend keeping this ratio under 30%.
So, for example, let's say you had a credit card with a limit of $10,000, and you put $5,000 on your credit card: your credit utilization for the month would be 50%, which is high in the eyes of the credit bureau. Keep in mind this calculation applies to all revolving credit accounts, e.g. credit cards and lines of credit.
Your payment history makes up 35% of your credit score. Late or missed bill payments will hurt your credit score—and it's even worse if your bill is categorized as unrecoverable and sent to a collections agency.
A negative item of any kind, such as a collection or bankruptcy, on your credit report severely impacts your credit score. So, it’s best to monitor your credit score yourself to make sure you’re in good standing before applying for a mortgage.
So if you’re ready to start your home buying journey, apply with Pine today and we can help answer any and all your questions.