Being aware of your credit score is one of the checklist items to qualify for a house loan. However, the impact of that number is widely misinterpreted and likely has less of an impact on loan-approval than buyers realize. We took a moment to interview credit score specialist and author Richard Moxley, to find out to what extent a credit score is a helpful tool and how to effectively use this information to move towards loan qualification.
Put simply, a credit score is an approximative number that is calculated based on previous credit history and money management in accounts that allow credit; for example: credit cards, car payments, or student loans. It is important to be aware of this number, but it has less specific implications than often believed. For example, frequently potential buyers disqualify themselves based on poor credit history or, in the event that they check their score with various software programs, decide that their score is too low or poor relative to other Canadians. Interestingly, while it is important to know what is on your credit reports, the score you have access to provides you with a guideline that encourages conversation around building good credit history.
According to his experience, Moxley notes that “Most Canadians are held back due to a credit issue in the past”, which causes them to disqualify themselves. He explains that credit score is actually based on a six or seven year time frame, demoding past credit issues from consideration. He affirms that lenders recognize that while clients may have at one time been connected with people and influences that prompted poor decisions or may have been uninformed or inexperienced about how to manage their credit, neither of these things tarnish one’s lending power indefinitely. As a result, potential buyers should stay well informed of where their credit score stands and not shy away from informing themselves of strategies to improve their score.
One of Moxley’s recommendations is to “fearlessly check your credit score.” Banks pull credit scores when buyers officially apply for a loan and buyers themselves can use programs to help gauge a relative score without impacting it (this is called a soft pull). Moxley recommends tools provided through equivax or transunion or even websites such as creditkarma.ca or borewell.com that can provide regular updates and notifications, if desired. He cautions however that these tools are very approximative and not quite the same score that banks use. For example, sometimes potential buyers using these programs receive the classification “poor” or their score doesn’t rank on comparison charts with other Canadians. As a result, potential buyers may believe they have a poor score when in reality, as Moxley explains “750 vs 850” is not a huge difference. He specifies that he has “never seen anything that required over 700” and adds “You could get declined with an 850 or approved with a 650”.The bottom line is that whether you are approved or not, while credit score plays into the approval process, it is just one of the elements.
Pre Approval process
When an underwriter considers a loan application, the credit score that is pulled by the bank does weigh into the process, but various factors play into the mortgage approval. Typically, regardless of the score, an underwriter considers public records such as a judgment or bankruptcy, loan and cellphone limits and how these might have impacted the score. This information provides the necessary elements for mortgage approval and none of these specific items equate to an automatic denial, and in the worst case scenario, may inform a necessary growth avenue. Moxley explains that in some cases a lower credit score might just require a 10% down payment instead of a 5% down payment. It is not simply a yes/no answer.
Moxley recognizes that getting your credit checked is a vulnerable process and encourages that even if you are declined, it is okay because “the key with credit is it just takes time”. Instead of focusing on the rejection, he encourages potential buyers to see “what you can do to flip that quickly”. He explains that there are over 100 things that affect the score produced by equivax and transunion and that strides can be made by conversing with mortgage professionals. For example, a couple of suggestions include not carrying a credit card balance over the half-way mark of your limit (pay it back right away) and diversifying your credit sources. Mortgage professionals have many suggestions as to how you can improve your documentation.
Qualify as a New Immigrant to Canada
Credit score is not a concept that exists in many countries outside of North America but there are programs for new immigrants that help them meet this qualification or help begin building a credit score. Credit cards should be issued from banks and applicants should stay well informed as to how this process works. Some banks provide “New to Canada” type programs for those wanting to buy a home in their first two or three years of moving or alternatives to regular credit cards in the form of “secure credit cards” which use a deposit as collateral if the credit card is not paid back. It is important to note that this is not a prepaid credit card, but it is helpful for those learning how to use the North American credit card process without accidentally impacting their credit card and mortgage approval potential.
In summary the credit score is an important factor to monitor but is only one aspect of loan approval and not a yes/no indicator. A credit score is an indicator that can catalyze discussion with a mortgage professional, so don’t hesitate to begin the process!
Further resources from Richard Moxley:
Youtube Channel: https://www.youtube.com/c/CreditTV
Podcast: https://creditgamecanada.podbean.com/Book: https://www.amazon.ca/Credit-Game-Rules-Every-Canadian/dp/0991690222/ref=sr_1_1?crid=X65LT