When applying for any type of financing, whether it be a credit card, car loan or even a mortgage, your credit score plays a large role in what you will be eligible to receive. When it comes to mortgage financing, here are some general guidelines to clarify how your credit score can change how you qualify.
Not Enough Tradelines
When a mortgage lender is looking at your credit bureau, they always want to see that you have had two active tradelines for the past two years. The reason for this is to ensure you can manage debt (if you carry it) and that you can make all your payments on time. If you are a person who only buys items when you have cash on hand, this can hurt you. The best practice would be to use your cards once a month (if you are not actively using them currently), as this will ensure the card is reporting activity to your credit bureau.
Multiple things can drag down your credit score and have a negative impact. One of the biggest would be any delinquency. A delinquency can be missed payments on a tradeline or possible collections reported to credit agencies. This can include credit card payments, car loan payments, student loan payments, cell phone payments, and even mortgages. On your credit report, each tradeline is given a letter and a number. The main letters are “I” meaning installments – such as a car loan that has a fixed payment, “J” meaning a joint account with another individual, and the most common is “R”, which stands for revolving, such as credit cards. The number ranks you from 1-9 based on how late your payments are.
Here is a guide to the North American standard account “R” ratings (Source: Equifax Canada):
- R0- Too new to rate; approved but not used
- R1- Pays (or paid) within 30 days of payment due date or not over one payment past due
- R2- Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due
- R3- Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due
- R4- Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due
- R5- Account is at least 120 days overdue but is not yet rated “9”
- R6- R6 Does not exist
- R7- Making regular payments under a consolidation order or similar arrangement
- R8- Repossession (voluntary or involuntary return of merchandise)
- R9- Bad debt; placed for collection; skip
When mortgage brokers are qualifying clients on a mortgage application, they take into account the ratios of Gross Debt Service (GDS) and Total Debt Service (TDS). These are drastically impacted by the beacon of your score. Beacon scores refer to your credit score number. If your beacon is above 680, it allows for the use of ratios 39 GDS and 44 TDS; if your credit score is below 680, it uses ratios of 35 GDS and 42 TDS. For mortgages, this can reduce your overall purchase power by thousands of dollars. If there are two applicants on the application and one of the scores is below 680, unfortunately you are then restricted to using the ratios of 35/42.
When it comes time to apply for a mortgage, it is always recommended to pull your own credit report well in advance. This allows you to go into the home buying process with a clearer understanding of where your credit stands.