First-time home owner? Learn how your credit score affects your mortgage.

Do you want a new home? A new home represents a large financial investment, but offers you many benefits. You can feel more secure in life with a place to yourself. Your home can be a sign of moving up in the world or a place to start a family.

Whatever your reason for a new home, new mortgages have many rules and criteria. A key part of getting a home loan that works best for you is your credit score. Your credit score determines the specific terms of your mortgage. You can secure a better mortgage if you can make your credit score more appealing to lenders.

We can help you find a better mortgage by providing you with a better understanding of the process. You can use our blog to see how to determine what kind of loan you can expect. With this information, you can plan ahead and find ways to get a better mortgage.


What Exactly Is a Credit Score?

A credit score is a number assigned to you by one of the three credit reporting agencies: Equifax, Experian and TransUnion. This score reflects your credit history and rates how well you manage your financial obligations. When you want a new mortgage, the first thing a loan office will do is look at your credit score to determine your risk factor for a loan.


How Do Credit Scores Work?

Credit agencies use the same criteria to measure your financial abilities. Their credit scores look at different aspects of your credit history, weighing different aspects to determine your financial readiness. This results in a formula that looks something like this.

  • 35% of your score is based on your payment history
  • 30% is your current debt and available credit
  • 15% is for the length of your credit history
  • 10% is for the types of credit you have used
  • 10% is for your new credit applications and searches

These credit score calculations primarily focus on your ability to pay back your loan, how you manage your current debt and the ways you acquire new debt. If you manage these aspects of your credit score well, you increase your credit score and access better mortgage opportunities.


Credit Scores and Interest Rates

When lenders see your credit score, they get a sense of how much risk they take in offering you a loan. They will then pass that risk on to you in the form of interest rates. Interest rates hedge the security of your creditor against your financial behavior. As a result, the lower your credit score, the higher you can expect your interest rate to be.

Unfortunately, higher interest rates mean thousands of dollars more money that you have to spend. This also means a longer loan period, which only increases your expenses. Even worse, many unforgiving banks will not offer a mortgage at all for lower scores, especially after the 2008 financial crisis.


Manage a Mortgage with Low Credit

If you have a lower credit score, you don’t have to feel resigned to higher interests rates. There are many things you can do to find a better mortgage or improve your credit score so you can refinance for a lower rate in the future. Here are just a few examples for how you can improve your mortgage.


1) Look for a Helpful Creditor

Not all credit institutions will make getting a mortgage hard for you. You should look out for forgiving lenders that help you find a beneficial mortgage plan. With help from us, you could find better rates and more helpful loans that you can refinance later.


2) Improve Your Payment History

As we saw with the formula, a good payment history accounts for 35% of your credit score. If you establish a better pattern of paying loans on time, you can significantly increase your credit score over a relatively short period of time. This will lead to lower interest payments in the future.


3) Make More than Minimum Payments

If you pay down the principal of your mortgage, you will end up with lower interest’s charges over time. This strategy will help your credit score and get you out of debt sooner, so long as you respect your other financial obligations. Paying more than minimum payments will make up for your larger interest rate.


4) Pay Off Your Other Loans

The second largest part of your credit score is your accumulated debt and your credit limit. If you reduce your accumulated debt and raise your credit limit, you help your credit score and free funds to focus on the mortgage. The more you pay off, the more room you have for more credit. This could help you get a mortgage in the first place and lead to a smaller interest payments in the long-run.


A new mortgage gives you unique opportunities and challenges. If you properly manage your credit score, you can secure a favorable mortgage that meets your individual needs. If you have any questions about becoming a first time home buyer in Newfoundland and Labrador, contact The Mortgage Centre for free advice.

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  • Annette Murphy

    Clarenville and Conception Bay North area

    Annette has been self-employed in the real estate and retail sectors for many years. From her experiences,...

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