Credit history: what impact will this have on your mortgage?

It is crucial to maintain a good credit rating if you decide to look for a mortgage for a real estate purchase (or any other venture for that matter). The better your credit rating is, the greater your ability to negotiate with lenders. This includes obtaining the necessary financing at the best interest rate.

Here is a very well-documented article that deals with everything you need to know about your credit rating before applying for a mortgage for your real estate venture.

Credit reports: what's the point of them?

Your credit report contains a wealth of information related to your financial situation. This document allows lenders to know your repayment habits and your level of debt so they can decide whether to grant you a mortgage.

In Canada, there are two companies responsible for managing credit reports: Equifax and TransUnion. Your lenders send them financial data about you on an ongoing basis. This information is used to give you a rating and a credit score, clearly demonstrating whether or not you are a good borrower.

Building good credit history before you buy

It's important to note that preparing for a real estate venture begins several years in advance and involves building up a good credit report. The first step would be to obtain a credit card and make monthly repayments before the due date. This shows your lender that you are a reliable borrower. In doing so, you build on your credit history, something that will undoubtedly be of use to you when the time comes to apply for a mortgage.

All forms of credit (student loan, car loan, credit line, etc.) will be taken into account in your credit report. It is therefore essential to pay each of your loans on time so as not to harm your credit report.

Having a credit report that is too recent could make it difficult to get a mortgage to buy a house. In fact, if your lender does not have enough information to determine how you are as a borrower, they might be reluctant to grant you a mortgage.

If you have just settled in Canada, it will certainly take a few years before you can get a loan at a favourable rate. The more time you take to prove that you are a good repayer, the better the rate you will be offered.

How can I see my credit report?

It is important to request a copy of your credit report each year to ensure you are building up a healthy credit rating. What's more, checking your credit report annually allows you to detect fraud and identity theft, as well as any incorrect information about you.

A request for this can be made free of charge by contacting the two rating agencies, Equifax and TransUnion, by phone, mail (or fax), or in person. You will receive your credit report by mail within 5 to 10 days of the request. For in-person requests, the report will be given to you directly upon confirmation of your identity.

You’re not the only one who can view your credit report; a mortgage lender or an employer can also request it, but only with your permission.

A mortgage broker could certainly help you to get a mortgage to buy a house. Learn more about the role of a mortgage broker.

Data contained in your credit report

Your credit report provides you with information on the size of your debts, your payment punctuality, and even whether you have already exceeded your credit limit. All the information contained there remains for a period of about 6 years (the retention period may vary depending on the credit agency and the relevant province).

Before agreeing to grant you a mortgage for the purchase of your home, your mortgage lender will check for the following information in your report:

• Your payment history, including any overdue payments;
• Any payments made without sufficient funds (or bounced cheques);
• Any accounts closed due to outstanding debts or fraud;
• Any credit you have taken out (credit cards, credit lines, personal loans, merchant cards);
• Your credit history (the longer it is, the better);
• Any debts sent over to a collection agency;
• Any cases of bankruptcy or unfavourable court decisions;
• The mention of any inability to repay debts or invoices;
• Any statement made as a consumer (following a dispute with a financial institution, for example).

The importance of correcting false information

The 16-36 age group makes up the largest percentage of victims of financial fraud. This is most likely due to the fact that this class of consumer is particularly active on social media compared to other age groups. Any personal information (name, surname, address, telephone number, or date of birth) can facilitate identity theft, increasing the likelihood of abnormalities showing up in your credit report.

Alternatively, it could be that the information is correct, but pertains to a one-off occurrence. This is particularly common in cases of bankruptcy due to divorce. In such a situation, it is important to explain that this is unlikely to happen again. In doing so, your lenders will be aware that this bankruptcy has not been caused by financial mismanagement on your part. They will most definitely take this into account when it comes to deciding whether or not to grant you a mortgage, something that they wouldn't have otherwise done.

Mortgages: what are the factors that impact your credit report?

In addition to ensuring the stability of your job, as well as a sufficient down payment, lenders will look carefully at your credit report to verify two main elements: your credit score and rating.

If you apply for a mortgage in order to buy a house, these will be a decisive factor when it comes to analyzing your report. Of course, if you have multiple loans and overdue payments, your chances of repaying a mortgage without any problems will be quite slim. You will therefore represent a risk for your lender, which could lead to them refusing your application. As such, you can say goodbye to your real estate venture.

Equifax/TransUnion Score

In Canada, credit scores range between 300 and 900 points. The higher your score, the better your credit report will be. Credit scores are interpreted as follows:

• Between 900 and 775 = Very good
• Between 774 and 650 = Good
• Between 649 and 525 = Medium
• Between 524 and 400 = Poor
• Between 400 and 300 = Very poor

Those with the best credit ratings (900 to 775) can easily obtain loans from financial institutions and can even negotiate their terms. This includes obtaining an attractive rate when applying for a loan.

Clients with average scores can obtain a mortgage, but they have less room for negotiating their interest rate.

For individuals with a score of 524 or less, it is quite difficult to get a loan. Even if they do, they may be offered a relatively high rate compared to the average. This is proportional to the level of risk that the lender assumes by lending them money.

Credit rating

When sending your financial information to rating agencies, banking institutions use codes (letters and numbers) to define the type of debts you accumulate as well as your repayment habits.

For example, the R1 rating means that you always pay your bills within 30 days, which is very visible to lenders. The R4 rating means that you pay your bills late (on average by 90 to 119 days), which will, of course, hinder your application for a loan. The worst is R9, which is used for bankruptcy cases that have already been sent to a collection agency.

Furthermore, your debt rate (ratio) will be calculated to determine your borrowing capacity as well as your repayment options. Two ratios are generally used: Gross Debt Service (GDS) and Total Debt Service (TDS). To get hold of a mortgage, your GDS must be less than 32%, while your TDS must not exceed 40%.

It is worth noting that none of your assets, savings or RRSPs are included in your credit report. However, they could help you to benefit from better borrowing conditions.

Improving your credit report to get a mortgage

Is your credit report in a bad state? Do you want to improve it so as to be able to get a mortgage? Well, it's possible, but it will take you several years! In this kind of situation, it is essential to take responsibility and contact your lenders. Explain your situation and make some realistic payment arrangements. This way, you can make regular payments and repay your debts little by little. It’s not a matter of paying off your debts as quickly as possible, but rather showing the lenders your good faith.

Another good way to improve your credit report would be to give up some of your credit cards, if you have more than one in your possession. However, be sure to cancel the most recent cards and keep the oldest ones so you can maintain your credit history.

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