How to Prepare Your Credit Score for Buying a Home in 2024Oct 13, 2023
If you’re looking to buy a home in 2024, now is the time to start preparing your credit score. A good credit score is essential to getting approved for a mortgage and obtaining the best interest rates.
In this article, we’ll provide you with some tips on how to prepare your credit score for buying a home in 2024. Besides providing you with tips to build and maintain a good credit score, we’ll also explain what a credit score is, how you can check yours and why it’s important to have a high credit score when buying a home.
Above all, the single most important thing you can do to make sure your credit score is mortgage-ready is to make all of your payments on time, whether it’s your credit card bill, loan payment or utility bill. By not having a single late payment on your credit report, you are demonstrating to potential mortgage lenders that you’re a responsible borrower and you are very likely to make your mortgage payments on time after you purchase a home.
What is a Credit Score?
A credit score is an important three-digit number assigned to you by the major credit bureaus. In Canada there are two major credit bureaus: Equifax and TransUnion. Equifax and TransUnion have their own algorithms and scoring models for determining your credit score, but both of them place high importance on maintaining good credit habits and behaviours. The two most important things you can do are make all of your bill payments on time and keep your credit utilization rate low. Doing these two things alone will go a long way in establishing a positive credit history.
When you apply for a mortgage, the lender you’re applying to will review your credit report, so your score plays an important role in determining whether you’ll get approved and what interest rate you’ll be offered.
How Can I Check My Credit Score?
The simplest way to check your credit score today is by signing up for a free service like Borrowell, Your Bank has a 'view my credit score' section, Equifax, TransUnion, etc. With these programs, you’ll get access to your credit score, which will be updated on a weekly basis, helping you to monitor whether your score is trending in the right direction. These apps will also help you identify which factors are affecting your credit score and what you can do to improve it.
What is a Minimum Credit Score You Need for a Mortgage in Canada in 2023 - 2024?
The minimum credit score you need for a mortgage depends on the kind of mortgage that you’re applying for and the type of lender that you’re applying with.
If you’re making a down payment of less than 20%, you’re required to pay for mortgage default insurance. Mortgage default insurance protects the lender in case you fail to repay your mortgage as agreed upon. Because of the added protection, some lenders are willing to allow a minimum credit score as low as 600 for an insured mortgage.
If you’re making a down payment of 20% or more, lenders tend to be stricter with their credit score requirement, and will generally want to see a minimum credit score of around 660-680.
These numbers apply to prime mortgages. If your credit score is below 600, you might need to consider an alternative lender, although you’ll likely need to make a bigger down payment, perhaps as high as 35%.
Why is it Important to Have a High Credit Score When Buying a Home?
If you want to buy a home, having a high credit score will help the mortgage application process go a lot more smoothly. Let’s take a look at the main benefits of having a high credit score when buying a home:
Lower Interest Rate
If you’re looking for the most competitive interest rate, having a high credit score really helps. You want lenders to fight for your business, not the other way around.
Although it varies from lender to lender, if you want the best interest rate on your mortgage, the credit score needed is usually at least 720. Coupled with proof of steady employment, a sizeable down payment and a healthy debt-to-income ratio, you’ll likely be offered the lowest interest rates available.
Buying a home can be stressful, but having a high credit score will help the mortgage approval to go a lot more smoothly.
When you have a high credit score, it makes the mortgage approval easier and faster, as you won’t have to spend time explaining negative factors on your credit report, such as missed payments and collections. The lender won’t have to ask follow up questions because your excellent credit report will speak for itself.
With a high credit score, you might also be able to omit the financing condition from your offer to purchase a home, which will make your offer more attractive to home sellers.
Fewer Lender Fees
If your credit score falls below a certain threshold (usually 600), that’s when you generally won’t qualify for a mortgage with a prime lender, and might have to see credit from an alternative, sub-prime lender.
While this can be a useful option, lender fees tend to be high with sub-prime mortgages. Lender fees typically start at 1% of the mortgage amount and go up from there. While 1% might not sound like a lot, depending on the size of your mortgage, it can add up to be a huge expense.
A Lower Down Payment
If you’re hoping to put less than 20% down on a property, having a good credit score is paramount. Putting down 20% may be feasible in mid-sized cities and small towns, but in Canada’s most expensive cities, saving up a 20% down payment can take years.
When putting less than 20% down, you’ll be required to have a mortgage default insurance. Only prime lenders offer insured mortgages, so in order to put less than 20% down, you will need to have a credit score that qualifies with a prime lender. An insured mortgage with a prime lender would typically require a minimum credit score of 600.
How Can You Improve Your Credit Score Before Applying for a Mortgage in 2023?
Now that you know why it’s important to have a high credit score when buying a home, let’s take look at some strategies to improve your credit score before applying for a mortgage in 2024.
Building and maintaining a good credit score takes time. By laying the foundation and exhibiting good credit score behaviour now, it can go a long way to improving your credit score in the future.
Make Your Payments On Time
The single most important thing you can do to build and improve your credit score is to make your payments on time. Payment history is the single most important factor when it comes to your credit score, and mortgage lenders will look most favourably on borrowers who have a track record of paying all their bills on time.
The simplest way to always make your payments on time is to set up automatic payments. That way, your bills will always be paid on time and you’ll eliminate the possibility of forgetting. That said, you’ll still want to take the time to review your credit card statements as they come in, so that you can spot any fraudulent charges and report them right away.
Reduce Your Credit Utilization Rate
Your credit utilization rate is the amount of credit you’re using as a proportion of the total credit you have available to you in your name. We recommend that you keep your credit utilization below 30%. This means, if you had a credit card with a credit limit of $1,000, you should aim to keep your balance below $300 at any one time. This is the second biggest factor that determines your credit score, so you want to try hard to keep your credit usage as low as possible.
Another way to help lower your credit utilization rate is to accept pre-approved credit limit increases when your bank or credit card issuer offers you one. This means you’ll have more credit available to you, so if you keep your spending level the same, you’ll be using a smaller proportion of your credit.
Leave Old Accounts Open
It’s a good idea to aim to leave as many of your old credit accounts open as possible, even if you rarely use them. That’s because your oldest credit products mark the beginning of your credit history, so if you close them, you’ll be wiping out that first chunk of your credit history. It’s a far better strategy to keep them open and even use them a few times a year to keep them active.
Avoid Applications for New Credit Products
Lastly, try to avoid applying for new credit right before you’re going to apply for a mortgage. Too many credit applications within a short period of time can drag down your credit score and signal to potential lenders that you’re struggling financially and are desperate for credit.
The Bottom Line
Having a good credit score is important when applying for a mortgage. To make sure your credit score is ready for the mortgage application process, make all of your payments on time, keep your credit utilization rate low, and avoid applying for too many new credit products in the months leading up to your mortgage. With a good credit score and some preparation, you can be on your way to owning your first home in 2024.
Flash Sale! Up to 70% Off!
Hurry Up! Time is running out
Stay connected with news and updates!
Join our mailing list to receive the latest news and updates from our team.
Don't worry, your information will not be shared.
We hate SPAM. We will never sell your information, for any reason.