Credit Home Buyer
Credit is a critical component to the homebuying process. How can you know if you are financially ready to become a homeowner?
This section guides you through some simple calculations to figure out your current financial situation, and how to improve it.
Credit Rating and Credit Bureau
Before approving a mortgage, lenders will want to see how well you have paid your debts and bills in the past. To do this,they consider your credit history (credit report) from a credit bureau. This tells them about your financial past and how you have used credit. Before looking for a mortgage lender, get a copy of your own credit history and examine it to make sure the information is complete and accurate.
What is a credit report?
A credit report is a history of how consistently you meet your financial obligations. A credit report is created when you first borrow money or apply for credit. On a regular basis, the companies that lend money or issue credit cards to you (banks, finance companies, credit unions, retailers, etc.) send the credit reporting agencies specific and factual information about their financial relationship with you, including when you opened the account and if you make your payments on time, miss payments or have gone over your credit limit. Credit bureaus receive this information directly from the financial and retail institutions and retain it to help other lenders make decisions about granting you credit. Your credit report is a history that will help lenders determine what kind of lending risk you are and if you are likely to repay your obligation on time.
What is reported?
Below is a list of the major sections found in a credit report.
• Personal identification: Name, address, date of birth and Social Insurance Number (SIN).
• Consumer statement: Allows the consumer to add a brief comment about any information in the report.
• Credit information: Details of credit accounts, transactions and history of late payments.
• Public record information: Secured loans, bankruptcies and/or judgments.
• Third-party collections: Any involvement with a collection agency trying to collect on a debt.
• Inquiries: All organizations or individuals that have requested a copy of the credit report in the past three years
What is a credit bureau?
A credit bureau is an agency that researches and collects individual credit information. There are two major consumer credit bureaus in Canada, Equifax and Trans Union.
Rebuilding your credit
The most effective way of re-establishing your credit is to get some creditors to report that you are paying as agreed. In time, these new current accounts will help rebuild your rating. The two easiest types of credit to obtain are RRSP loans and secured credit cards. Ask me for details and more suggestions.
What is a credit score?
Your credit score is a statistical formula that translates personal information from your credit report and other sources into a three-digit score. For example, when you fill out a loan application, pieces of information from the application along with information from your credit report will be used to compute a score that indicates to the lender the statistical probability that you will become delinquent on the loan.
Improving your credit score
Pay all of your bills on time. Paying late or having your account sent to a collection agency has a negative impact on your credit score. Do not run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also
help your score. Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why. Most scoring formulas will not penalize you if, for example, you are shopping for the best rate on a mortgage or car loan.
If you have any questions about this section, please reach out to me and I’d be happy to help.
A credit rating for each trade item is reported on your credit report as well as an overall credit score. The rating for each individual trade line is made up of the following numbering system:
|1||Too new to rate|
|2||Paid within 30 days, as required.|
|3||Over 30 days but less than 60 days|
|4||Over 60 days but less than 90 days.|
|5||Over 90 days but less than 120 days.|
|6||Over 120 days but not yet sent for collection|
|7||Making payments under consolidation order or similar agreement.|
|9||Bad debt, placed for collection or skip.|
Are you financially ready?
How much are you spending now?
Calculate your household expenses
The first thing you need to figure out is how much you are spending now.
1.Calculate your household expenses
What is your present household budget? How much are you now spending each month on household expenses? The Current Household Budget worksheet on the next page helps you take a realistic look at your current monthly expenses. Fill in all the figures that apply to you, and add them up.
2.Calculate your monthly debt payments
Do you know how much debt you are carrying? You need this information to figure out whether you are financially ready for home ownership. If you decide to buy a home, mortgage lenders will ask for this information.
Use the form below to determine your current monthly debt payments. Fill in all the figures that apply to you.
3.Calculate your total monthly expenses
Your total monthly expenses are your household expenses plus your debt payments.
To calculate your monthly expenses, add the total from the Current Household Budget form to the total from Monthly Debt Payments
form, using the form below.
4.Prepare for pre-approval
Now you have a better understanding of your current financial situation, and can start preparing for a pre-approval interview. Find out
what else you need to prepare for the pre-approval process in Section 3.