Managing your credit history and beacon score is one of the easiest ways to help yourself when it comes to financing the home of your dreams but it does take some forethought. There are several components to your credit report that mortgage companies look at when deciding whether or not to loan you money.
The first is your beacon score which is a complex calculation based on all the other data in your report and can range from 300 – 900. When it comes to mortgages a score of 680 or higher will make you eligible for most programs from both lenders and insurers (ie: CMHC). With a score of 600 – 679 you will still be able to get a mortgage but you may be excluded from some programs like the free down payment program or CMHC’s flexdown which enables you to borrow your down payment. Once you get below 600 then you have dropped below CMHC’s high ratio guidelines and will therefore require at least a 20% down payment and you will pay a higher interest rate.
The next item on your report will be your inquiries. This shows every time a credit grantor has done a credit check on you. A handful of these each year is acceptable particularly if you are opening the account that you’ve applied for. Every time you apply for credit and there is no corresponding account opened it will lower your beacon score. A very common problem is comparison shopping, especially for vehicles. When you are shopping for a product where the retailer also provides the financing, be assertive with the sales staff and tell them not to check your credit until you’re ready to take care of the financing and only do it once.
Your credit report will also include any collections or judgements you may have. These can really kill your chances with a lender and will need to be paid in full before anyone grants you additional credit. If you ever have the misfortune of dealing with a collection agency, communicate with them promptly. If you pay it immediately, they may not report it to Equifax or TransUnion. This is also where bankruptcies or court judgements will show up. One bankruptcy will stay on your credit for six years after discharge and most lenders will consider you after two years if you have made an effort to rebuild your credit. If you declare bankruptcy a second time they both stay on your record for 14 years each and no credit grantor will consider you for a mortgage. It is worth noting that if you are clearing up collections or judgements, making a settlement is not as good as paying the debt in full as lenders are looking at whether or not they will get all their money back if they lend to you.
The last part consists of your trade lines which is all of your open or closed accounts for the last six years. It is worth noting that mortgages and utilities such as cell phone accounts do not report to the bureau; although some will if you miss a payment. Each trade line shows the lender name; the date you opened the account; the date it was last reported; your credit limit; the type of loan (ie: revolving or instalment); the number of payments that were late by 30, 60, or 90 days; a rating such as R1 (revolving account in good standing) or I9 (an instalment loan that has been sent to collections; and finally whether or not the account has been closed and by whom.
There is a lot of information here for prospective credit grantors to judge your history of repaying debts. CMHC requires you to maintain two open lines of credit with at least 12 months history to qualify for a high ratio mortgage. Keeping three revolving accounts with a good history will maximize your beacon score. Other factors can include who the lenders are – RBC or Visa have stricter criteria than Citifinancial and therefore look better on your report. Also, high balances on your revolving accounts will bring down your score particularly if they are over your limit.
If you have any questions about managing your credit or would like to do a credit review in order to avoid any problems with your future financing needs, please call me and I would be happy to review your particular situation and create a strategy to best serve your borrowing needs.
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