How Good Credit Can Help You Ace Your Mortgage Approval Chances

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We’ve said it before and we’ll say it again: Your credit score is one of the most important factors in whether or not you qualify for the best mortgage rates. And since getting approved for a good mortgage rate can help you land your dream home, you’ll want to make sure you have a good credit score.

But why exactly can your credit score impact your chances of getting good mortgage rates? 

Below we’ll break down how your score is calculated, what factors may be bringing it down, and the steps you can take to improve your credit score and maximize your mortgage approval chances.

What is your credit score?

Your credit score is a three-digit number between 300 and 900 that summarizes how financially responsible you are. The higher the number, the more attractive you are to lenders — including banks and mortgage brokers. Credit scores can fall into five ranges, from poor to excellent:

  • Poor: 300-574
  • Below Average: 575-659
  • Fair: 660-712
  • Good: 713-740
  • Excellent: 741-900

In general, you should aim to have a fair credit score of 680 or above. Some mortgage providers allow credit scores between 600 and 680, but these providers may charge higher interest rates. You can use a service like Borrowell to check your credit score for free.

What could be bringing your credit score down?

Your credit score is calculated based on five main factors that Equifax and TransUnion collect information about and store in your credit report. Each of these factors makes up a certain percentage of your overall score:

  1. Payment history (35%)
  2. Credit utilization (30%)
  3. Credit history (15%)
  4. Credit mix (10%)
  5. Credit checks (10%)

Although each of these factors impact your credit score, we recommend focusing on the top three factors when it comes to improving your credit for a mortgage. Here’s a breakdown of how each of these factors could be impacting your credit score and your chances of qualifying for a mortgage.

Payment history

Your payment history is the largest factor that impacts your credit score. This makes sense, since your credit score is supposed to show lenders how financially responsible you are. If you consistently pay your bills on time and in full, you can maintain a healthy credit score. 

Late payments, however, can have a large negative impact on your score. If you forget to pay a credit card bill, your phone bill, your internet bill, or other bills, your provider will report your late payment to the credit bureaus and it will be recorded on your credit report. 

Regardless of the amount owed, late payments can really hurt your score. This viral TikTok shows how even a small missed payment can decrease your credit score by 100 points and harm your chances of qualifying for a mortgage. 

Late payments and other negative credit information can stay on your credit report for up to six years. The longer you leave a late bill unpaid, the more damage it can do to your credit. If you’re looking to get a mortgage now, make sure you don’t have any late payments plaguing your credit score!

Credit utilization

Your credit utilization is how much credit you’ve used up on your credit cards and lines of credit out of the total amount of credit (your credit limit) available to you. To generate a good credit score (and show lenders that you can manage credit well), you want to make sure you’re not using too much credit available to you. 

The golden rule is to keep your credit utilization rate at 30% or under. Using too much credit will negatively impact your credit score, and lenders may think you’re stretched thin financially if you’re constantly maxing out your credit cards. “Revenge spending” may be the hip thing to do, but having financial discipline now can help you qualify for an affordable mortgage and improve your finances in the long-run.

You can calculate your credit utilization rate by adding up all your credit balances, dividing them by your combined credit limit on your accounts, and multiplying by 100 to obtain a percentage. 

Does it sound confusing? With Borrowell, your credit utilization rate will automatically be calculated for you based on information from your Equifax credit report.

Credit history

Your credit history is a combination of a few key pieces of information, including how long you’ve had credit accounts open for, the average age of your credit accounts, and the oldest account you have open. 

Building credit history is an important part of establishing a strong credit score, especially if you’re looking to buy a house. Banks and mortgage brokers will be more willing to work with you and offer you attractive rates if you have an established history of using credit cards, loans, and other financial products responsibly. 

If you don’t have much credit history, lenders will be less likely to work with you. While there is no clear-cut rule about how many years of credit history you need to get a mortgage, it can take up to six years to build up a credit score of 680.

How to improve your credit and maximize your approval chances

Now that you know the main factors that could bring your score down, here are some general tips on how to improve your credit score, increase your mortgage approval chances and avoid rejection. Try to get these things done before you start applying for a mortgage.

1. Pay your bills on time, every time!

Making bill payments on time is essential to improving your credit and maintaining a good credit score. You should set bill payment reminders on your phone or digital calendar so that you never miss a beat. You could also use bill tracking solutions to alert you about upcoming bills or automate regular bill payments through your bank account or credit card.

2. Arrange payment plans for late bills

If you have an overdue bill, you should contact your lender or service provider as soon as possible to arrange a payment plan. If your bill doesn't have a minimum payment option (for example, a utility bill), you should call your provider and arrange a payment plan. Arranging payment plans with your service provider can help you attain grace periods and avoid late payments from plaguing your credit report and credit score.

3. Regularly review your credit report

We recommend regularly checking your credit report. Downloading your credit report can help you understand what your credit accounts look like and how negative information on your credit report could be bringing your credit score down. If late payments have been reported by a lender, you’ll be able to see them on your report. If you believe there’s an error or incorrect information on your report, you should contact the credit bureaus to get that information corrected, as it could be a fairly quick fix that helps you improve your credit score.

4. Pay off your credit card balances to reduce your credit utilization

If you’re currently carrying large balances on your credit cards, making large payments to reduce your balances can help you reduce your credit utilization. This can often be an effective method of increasing your credit score in a relatively short period of time, especially if your current credit utilization rate is well above the recommended rate of 30%.

5. Increase the credit limit on your credit cards

If managed responsibly, accepting an offer from your credit card provider to increase your credit limit can help you improve your credit score. The key is that you must maintain the same balance on your card while increasing your limit. For example, if you increase your credit card limit from $3,000 to $4,000 while keeping your credit card balance at $1,000, then your credit utilization will decrease from 33% to 25%. It can be very tempting to splurge when you increase your credit limit, so remember to stay disciplined in order to reduce your credit utilization rate. 

Check your credit score to see what mortgage rates you can grab

Not sure what your credit score looks like? You can use a service like Borrowell to check your credit score for free. No credit card is required, and it takes less than 3 minutes to sign up. With Borrowell, you can also see what mortgages you’re likely to qualify for based on your credit score. Use Borrowell to check your credit score and see what mortgage rates you can qualify for, and use Properly to find your dream home with confidence.

Properly is a Canadian tech-enabled real estate brokerage transforming the home buying and selling experience as the only service in Canada that helps homeowners to buy before they sell.