Buying your first Toronto Home? Your credit score will determine when you can go from renting to owning.
This post will explain credit score basics for first time buyers in the Toronto Real Estate Market. If you have any questions that aren't covered here, please send me a message or post your question on my facebook wall (I'm sure others will benefit)
What is a Credit Score or Beacon Score and why is it important to a first time buyer?
When you approach a lender to get prequalified for a mortgage they're going to ask you to authorize them to do a credit check. One of the items that shows up at the top of the Equifax credit report is called a Beacon Score.
The score factors in things like how much available credit you have, your payment history, how much actual debt you have, your annual income, etc, to determine what kind of a lending risk you present: how likely you are to repay your debts on time. The range is from 300-900, with 900 being a perfect score; most Toronto home owners are somewhere around 700.
In order to get into the Toronto Real Estate market and get the best possible rates on your mortgage, you need a 'decent' score. Most mortgage lenders would like to see a score above 650. While this isn't the only factor they consider, it is one of the most important. Lots of first time buyers have weak credit scores because they have past credit situations that still need to be cleaned up.
Before you apply for a mortgage - Check Your Current Credit Score
It's not necessary, but it's a good idea to know where you stand before you approach a lender.
For a fee, these agencies will provide you with an online copy of your credit score and a credit report — a detailed summary of your credit history, employment history and personal financial information they have on file. Or, you can get a free copy of your credit report from them by mail.
How First Time Buyers can Improve a Credit Score & Get into the Toronto Real Estate Market Sooner
Keep in mind that the key to a good credit score is demonstrating to lenders that you have the ability to manage credit. The following items demonstrate credit-worthiness and improve your credit score:
- Always pay your bills on time. If you cannot pay the full amount, always pay at least the required minimum shown on your monthly statement.
- Pay down credit card balances. The number one way to increase credit score is to pay down credit cards so 30% of limits remain untouched. Revolving credit, like credit cards, has a more significant impact on credit scores than car loans & lines of credit.
- Reduce the number of credit card or loan applications you make.
- Pay off your loans and lines of credit as quickly as possible. A history of loans 'paid in full' adds points.
- If you find any errors in your credit report, you need to notify the credit bureau and the lender who made the error, immediately. Even though the notation may not be removed right away, it's important for a lender to see that you don't believe there are any unpaid debts. Ignoring this can seriously hurt your score.
If you're just beginning the transition from renting to owning you may also want to: