In the two previous episodes, we talked about verifying, or which documents prove, the ownership and origin of the funds of the initial or down payment, as well as how to verify our income. In this fifth episode, you will show you how to prove to your lender that you are a reliable borrower with your credit history.
Your lender needs to know that you are a reliable borrower with your credit history, he wants assurance that you are a responsible borrower that will always make your mortgage payments on time. Your lender will look at your credit habits, for that reason, ask yourself; Do you pay your bills on time? Do you tend to run up your credit cards?
These habits are reflected in your credit rating.
A credit report is a summary of your credit history. Potential creditors and lenders use credit reports as part of their decision-making process to choose whether to extend you credit — and at what interest rate. It's important to check your credit report regularly because creditors and lenders use the information in it, such as your payment history and the number of active credit accounts, also known as “tradelines,” to evaluate your creditworthiness.
There are two nationwide credit reporting agencies – Equifax and TransUnion – both of which maintain consumer credit reports containing information reported to them by lenders and creditors. Your credit report may not be identical with each of the two agencies, as some lenders may report information to both of them, just one, or sometimes none at all.
Your Equifax credit report contains four types of information:
1. Identifying information:
This section of your credit report includes personal information, such as your name, address, Social Insurance Number (S.I.N.), and date of birth, and may also include employment information. The identifying information contained in your credit report is not used to calculate credit scores.
2. Credit accounts, also known as “tradelines”:
Your credit report lists the credit accounts, also known as “tradelines,” that you have established with lenders. Each credit account as reported by lenders generally contains information on the type of account (for example, a credit card, mortgage, or auto loan), the date you opened the account, your credit limit or loan amount, the account balance, and your payment history.
3. Inquiry information:
This section includes information about the companies who have pulled a copy of your credit report, sometimes known as an “inquiry.” There are two types of inquiries that you may find listed in your credit report: “soft” inquiries and “hard” inquiries.
Soft inquiries may include your own requests for your credit history, inquiries by companies extending you pre-approved offers for credit cards, or inquiries made by your current creditors who wish to perform a review of your credit (also known as “account monitoring”). Soft inquiries are only visible to you and not to potential lenders or creditors.
Hard inquiries occur when a potential lender reviews your credit history because you have applied for credit such as a new loan or credit card. These may remain on your credit report for 36 months. While hard inquiries do impact credit scores, soft inquiries do not.
4. Public record and collections information:
Public court record information reported to Equifax, such as bankruptcies, is also listed in your credit report. Past-due accounts that have been turned over to a collections agency could also be included in your credit report
A very important habit is to check your credit history to be monitoring your good standing. "Soft" inquiries do not affect our credit history, but be very careful, multiple "Hard" inquiries in a short period could lead lenders and credit card issuers to consider you a higher-risk customer, as it suggests you may be short on cash or getting ready to rack up a lot of debt. So consider spreading out your credit card applications. This may be meaningful to a potential lender when assessing your creditworthiness.
To demonstrate your credit rating, you'll need two revolving sources of credit, for instance, two credit cards or a credit card and line of credit, both two years old at least.
Worried that some sloppy financial habits might keep you from a great rate or even from getting a mortgage?
Then, build yourself a good credit. This important factor in your mortgage negotiation is entirely within your control, if you start right now with good credit habits, your rating will quickly improve, here's what's important:
Pay every bill on time, that one habit is your single biggest game-changer, make a commitment to never let a bill get passed to.
Don't run up your credit cards use the 50% rule: if your limit is $5,000 never let the card expenses go higher than $2,500.
Don't apply for credit too often. If you're asked if you would like to apply for our store card to save X dollars on your purchase, don't do it! These pitches can be a credit pitfall.
Don't ever let any bill go to collections even if it's for a small or disputed amount.
These black marks on your credit are hard to erase, if it has already happened, be prepared to explain why and be sure it's paid in full and reported to Equifax.
If you've ever been bankrupt or under a consumer proposal, you're going to have some extra challenges. You will need to have been discharged for two full years, and you'll need to prove that you re-established credit after the discharge with at least two re-established revolving credit items with a two-year history of satisfactory repayment.
Strong income and down payment will help you. If you need to polish up your credit, get in touch, your mortgage broker can review your situation and give you some tips on how to boost your credit rate. Remember we can give you advice for free.
Finally, to wrap up this ABC of Mortgage in Canada series, in our next episode we will talk about how a lender determines if you are eligible for a mortgage. We will make a quick recap, by looking at mortgages from the point of view and criteria of analysis of a financial institution. We will talk about that in our next Episode.
We hope this information has been useful to you, and if you think it could be useful to someone else, share the link. Thank you for listening to us. Bye!
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