Road to home ownership: Build your credit rating to get the best rates
Whether you plan to buy a home in three months or three years, there are steps that you can take to ensure that when you’re ready to make the purchase, your path to owning a home is clear. In this, the third and final installment of our “Road to Home Ownership” blog series, we’ll help you understand why it’s important to start building your credit rating now to protect your ability to buy a home later.
Why does your credit rating affect borrowing rates?
When you don’t have a credit history, it isn’t easy to demonstrate to a lender that you are capable of managing credit wisely. While it may be possible to be approved for a mortgage with a limited or “thin” credit history, increasing your credit rating will provide you with a lower mortgage rate.
While the increased monthly payment at a higher interest rate might not seem like much, it can amount to tens of thousands of dollars over the lifetime of a mortgage. When you think of it like that, taking the time to build your credit rating now makes a lot of financial sense!
The importance of credit scores
While there are a number of factors that are considered when a lender evaluates your application for a mortgage, your individual credit score is one that is weighted heavily in the decision. Factors that affect your credit score include payment history, the way you use credit, and the types of credit that you have used. But if you have been avoiding the use of credit, hoping to improve your chances of getting a mortgage, you should know that a lack of established credit can also lower your credit score.
If you haven’t already done so, consider requesting a copy of your credit report from Equifax or Transunion, consumer credit reporting agencies that collect consumer credit history based on information that is reported by credit-providing institutions. Once you know more about what has been reported in your credit history, you can take the necessary steps to build or improve your credit score.
Establishing a credit history
If you don’t have much history in your credit report, you might be tempted to try to build it quickly by applying for as many credit accounts as possible in a short time. Don’t! These credit-seeking behaviours will be reflected on your credit report and can ultimately do more harm than good. Instead, you might consider getting a secured credit card, like our award winning Home Trust Secured Visa.
A secured credit card is backed by a deposit that you provide. As you use the card and make regular payments towards your balance, your credit score can improve and set you off on the road to home ownership.
If you are planning to buy a home, it’s a good idea to speak with a mortgage broker sooner than later to help understand your home financing options and get a sense of how much of a mortgage you qualify for.
The three-part Road to Home Ownership series offers information for those hoping to purchase a home one day. Be sure to read the rest of the posts in the series: Road to home ownership: Preparing to buy a home, Road to home ownership: Will gig work affect your ability to get a mortgage?, and visit our website to learn more.
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