Editor’s note: This article was originally published on July 25, 2013 and was updated on August 20, 2015.
Let’s face it. Not everyone is perfect when it comes to their credit. From students who get their first credit card and run them up, to high-income earners who buy everything on credit because they think they’ve got more disposable income than they actually have. Then there are life events like divorce that can throw even the most financially savvy people off for a while. Most of us have been there at one point or another. The question is, how do you come back from it if you need to reestablish your credit to get a mortgage? The best interest rates are only available at “A” or “A+” lenders, and you only get these rates if you your credit score is in good shape. The goal is to be above 680, but that’s not an impossible number; you can get there with a little bit of time and hard work.
First Order of Business: Pay Off Outstanding Historical Items
First things first, outstanding items that are in collections, debt consolidations, and bankruptcies must be discharged or paid off before you can begin to rebuild your credit. Knock these items off by making minimum payments on the rest of your credit and get them off your record as quickly as possible. A larger blemish on a credit history like a bankruptcy usually requires a discharge and full reestablishment of a credit line for at least two years before you can look at getting a mortgage.
Outstanding items that are in collections, debt consolidations, and bankruptcies must be discharged or paid off before you can begin to rebuild your credit.
Get Access to Your Credit History
This post has good tips on how to get your credit report suggest how you can remove certain historical items from your record. Keep monitoring your credit score to see how it improves as you pay off your credit; as your credit score number climbs, you’ll get the extra motivation you need to get where you need to be.
Have Two Active Credit Items Open
According to First Foundation mortgage brokers , lenders like to see two active credit items, or “trade lines” open and paid regularly for two years with no late payments, especially if you’ve had a less-than-stellar credit history. This proves to the lenders that you’ve learned good financial management and makes you an attractive potential borrower. Whatever you do in this two-year period, do not make late payments.
If you can’t get a regular credit card because of a poor credit history, you can get a secured credit card by leaving a deposit with your bank to secure the card against. Lenders like to see a healthy and relatively unused limit of $2000 to $2500 on your two trade lines to show that you have reasonable financial management skills.
Lenders like to see a healthy and relatively unused limit of $2000 to $2500 on your two trade lines to show that you have reasonable financial management skills.
Another option for those with a not-so-great credit history is to take out an RSP loan with your bank. The amount of the loan is secured against the RSP, so most banks will be willing to lend to you under these conditions. You’ll also be saving for retirement while you’re building your credit. These loans can also be small so that monthly payments are manageable for those trying to repay other obligations at the same time.
What if You Want a Mortgage Now?
If you don’t have a credit score at or above the magic 680 number, that is okay. The minimum requirement for an insured mortgage in Canada is 600. With a credit score between 600 and 680 you will still be able to work with an A lender, however it will be a little harder to qualify (tighter ratios). If your score is below 600, there are lenders who will consider your application with a minimum of a 20% downpayment. However according to Huynh, looking for a co-signor or working through a plan to increase your credit score is probably a better idea than signing a mortgage with a "B" lender at considerably higher rates and fees.
What if I’m a High-Income Earner?
One of the best pieces of advice that First Foundation mortgage brokers gives for high-income earners is to save buying “toys” until you get your mortgage. “Too much debt is the worst situation for lenders to see. If you have a truck payment and a Harley payment, there will be no mortgage because your debt load is too much. Your TDS (Total Debt Service ratio) should be 40% or less. When you have a $1000/ month truck payment or more, that unsecured debt makes it difficult to get financing unless you have the income to balance that out.” Regardless of your income, mortgage qualification is based on your ratio of debt to income - it’s all mathematics.
In this case, the obvious solution is to get your TDS down to an attractive number for lenders by paying off one or more of your outstanding loans, or simply putting off buying your Harley Davidson until you get your mortgage.
Why a Broker is Your Best Financial Advisor for A Mortgage
First Foundation mortgage brokers stress the importance of talking to a mortgage broker about your particular situation before going ahead and trying to repair your credit. They’ll tell you exactly what to pay off first and what you need to do in order to get into the financial position where you can get a mortgage. Don’t go it alone. Even an accountant or a financial advisor won’t have the hands-on experience with mortgage lenders that a broker does, although both can help you get into a better financial position by managing your finances and taxes properly. It takes a team to get where you want to be with your credit; make sure a mortgage broker is on yours.
To get advice on what you need to do with your credit to get mortgage-ready, give one of our helpful brokers a shout or come into our offices. We’ll help you get where you need to be, and best of all, our advice is free.