How to prepare your credit score for a mortgage application
Download the bite-sized PDF guide here. Our gift to you!
We often advise our clients to prepare their credit score at least two years from the time that they hope to apply for a mortgage. Frankly, money matters should regularly be considered to ensure your habits are (and appear) healthy. Preparing your credit score for assessment is one of these tasks, so as your trusted ally we’re about to break down the who, what, and why to help you on your way to securing a mortgage.
Why the invasive checks?
Imagine you are going to lend someone some money - how would you protect yourself against the risk that they will not be able to pay it back? One way is to carry out a thorough assessment of the person you are lending the money to before you actually do. History and current habits tend to tell us whether a person is prepared to take on a large amount of debt.
Mortgage lenders are no different. They want to know that their money is safe in the hands of their customers and carrying out a credit check is a way to do this. Information on our use of (or lack of) lending and credit products is accessible to mortgage lenders, this gives them an idea of:
Are you using any credit products?
How are you using these?
Are you dependent on them?
How do I build credit?
Even if you are wealthy you may not have good credit, building a credit history is done by using the various products and services offered by institutions. These can include:
Revolving credit - the typical form of revolving credit product is a credit card. You have a credit balance which you can draw upon, pay back, and draw upon again.
Instalment credit - debt you have borrowed and make fixed monthly payments to pay back. This includes student loans, mortgages, and personal loans.
Service credit - this is credit in the form of goods and services such as utility and cell phone bills.
I’ve been doing this for a while, where am I at?
So, you’re aware of and have been using one or more of these products. How can you prepare your credit score for a rigorous dressing down by a mortgage lender? We’ll cover the benchmark score you should be aiming for, what the implications are of not attaining this, and some of the best habits to get into moving forward.
What is a good credit score?
Credit scores are given on a scale of 300 to 900. As an example,
300 is the lowest score or the starting point;
750 is the target for most people, this number will most likely qualify you for a standard loan with standard rates;
900 is the highest score possible, congratulations!
The consensus is that a score above 680 is considered to be comprehensive enough to qualify for a mortgage with manageable interest rates. Anything lower than this, say in the 600 - 680 range, and you will likely pay higher interest rates that could add up to tens of thousands over the lifetime of your loan. It is really worth crossing the threshold for better rates. Other implications of a low score include not getting approved for the loan full stop!
This stuff can be overwhelming. A good first step is to get a free score assessment done and then book a meeting with your bank’s financial advisory planning team. Here, you’ll be able to share your goal and how far out it is, they’ll support you with an action plan to boost your score and prepare you for the application.
What are some of the best credit habits I can get into?
Opening a credit account and keeping it in good standing is an obvious way of building your score, but there are some other great habits to get into that are really noticed by mortgage lenders.
Pay on time - maintaining a positive payment history on all forms of credit is vital, institutions suggest payment history accounts for 30% of a credit score.
Don’t burn through your allocation - maintain a credit usage percentage somewhere below 30%. If your credit limit is increased from $2,000 to $5,000, don’t go and spend it all at once. It is more favourable to use 10-30% of the balance then pay it off regularly.
Asking for more can indicate that you are living beyond your means, so limit the number of credit inquiries (extensions/ limit increases) you make.
Don’t just rely on a credit card, try to use a diverse range of credit products if they make financial sense for you.
Be really wary not to use too many of these products at once, your debt to income (DTI) ratio is an important factor in determining your loan-worthiness. According to Experian, to get a qualified mortgage, your DTI needs to be below 43%. In fact, the lower your DTI the better, and many lenders prefer ratios below 36%.
Even with good credit, you may still need to prove the source of your down payment.
So you’ve mastered the art of the credit check and the mortgage lenders can see that you’re an admirable human. However, you may still need to provide the source of your down payment to ensure that this is not a debt liability for you. For example, if you were lucky enough to receive a down payment gift from your family, you will need to prove it to be. There must be no expectation of the money being paid back, otherwise that would be considered a loan. Borrowed down payments are sometimes prohibited and always negatively impact your “debt service ratios.”
Read other buyer’s guides
