If you’re in the market for a new home, you’ll likely need a mortgage to finance your purchase. Understanding how your credit score impacts your ability to access good interest rates and qualify for financing will help you better navigate the home buying process and ensure you stay informed. Before you start looking for homes, shift your focus to building up good credit so when the time comes, you can be confident that your finances will help you secure more competitive rates and lock in a better deal in the long term.

Limit Credit Inquiries

Sometimes life happens, and there may come a time when you need to apply for more credit. If you find yourself in this position, just make sure that you keep these applications to a minimum, so when mortgage lenders check your credit report, they don’t see red flags of a borrower who may be living beyond their means or urgently in need of more money. It’s important to note that any checks that come through within a 2-week time frame will be counted as one hard inquiry, so when you’re shopping around for better rates on a mortgage, be sure to cluster your research so your credit score doesn’t take an unnecessary hit when you’re about to need it most.

Hard Vs. Soft Inquiries
It’s important to understand the difference between hard credit checks and soft credit checks, as they both have different impacts on your credit score. Hard checks appear on your credit report and will count toward your credit score. These types of checks can include applications for a new mortgage, as well as new credit cards and some rental/employment applications. Any lender who does a hard check on your credit report, will see all of these previous inquiries.

Soft checks appear on your credit report, but they don’t affect your credit score as they’re only visible to you. Some examples of soft checks include the action of you requesting to see your personal credit report or businesses asking for your credit report to update their records for an existing account you have with them.

Avoid Taking Out New Loans
New credit inquiries account for 10% of your overall credit score so don’t mindlessly open new credit accounts for the sake of earning more rewards at a local store or unlocking better prices per litre at the gas station. Constantly applying for new credit can come off as a red flag for lenders who may see you as an irresponsible borrower that’s likely a higher risk, especially when it comes to looking for mortgage financing.

Maintain Low Credit Card Balances

Credit utilization makes up 30% of your credit score so always keep an eye on how much available credit you’re using. While you may have a credit card with a $10,000 limit, that doesn’t mean you should be using anywhere near the maximum credit. As a rule of thumb, try to use less than 30% of your available credit at any given time as it’s always better to have a high credit limit and use less of it each month.

If you tend to use up a lot of your available credit, there’s a chance that lenders may see you as a risk, even if you pay your balance in full when it’s due. To calculate your ideal credit usage each month, add up the credit limits for all of your credit products (loans, credit cards, etc.) and then calculate what 30% of that total equals so you know how much credit you should be using each month overall.

Make On-Time Payments

Your payment history makes up 35% of your credit score making it the biggest factor in determining your overall number. Payment history refers to how timely you are when it comes to making your payments on past and current debt. It’s very important to always make your payments on time, even if it’s only the minimum that you’re paying. Be sure to never skip a payment, even if a bill is in dispute, and always reach out to your lender right away if you’re concerned about not being able to make a payment.

Review Credit Report for Errors

If buying a new home is in your future, do yourself a favour and start building smart credit habits in advance. Always keep an eye on your credit report to ensure errors are properly reported and if you come across any issues, follow the necessary steps to get things resolved in a timely manner:

1. Identify the credit report that includes late payments or incorrect charges you’d like to dispute.
2. Contact your creditor about fixing the error so they can investigate your claim.
3. If the creditor is taking too long or refusing to fix the error, contact the credit bureau.

Your credit score plays a huge part in determining whether you qualify for a mortgage, so actively trying to improve your credit is always a good plan. When it comes to buying a home, the more financially prepared you are, the better off you’ll be in the long run. Ask questions, take note of your habits, create a budget and seek out professional assistance to ensure you’re prepared to take on homeownership. Looking for some insight into the current market? Want to learn more about how you can improve your credit before buying a home? Get in touch with our team to start the conversation!