For most people, a mortgage is going to be one of the largest debts they manage in their lifetime. With this in mind when mortgage lenders are looking at an application they have to consider if an applicant has demonstrated a history to borrow and repay. The thicker and longer the history, means overall less inherent risk. Lenders and mortgage insurers look in depth at a credit report (Equifax/Trans Union) to get a good perspective on credit and the relationship with debt an applicant has.
Good credit and debt load are not the same thing.
Good credit means that you have active and credit in good standing, meaning you use it, pay on time, and keep the balances low compared to the limit trusted to you. Debt load is the amount of debt you carry on your given credit.
CREDIT: If you do not use credit- meaning you don’t have credit in your name you will not demonstrate that you have the capacity to borrow and repay. From a mortgage lenders perspective, not having a history of credit usage makes you extremely risky – even if you have a great job, income and down payment- see the 5 C’s of Credit for more information. A small credit limit also does not show a good capacity of being able to borrow and repay, so aim for a minimum limit of $2500 if possible; a limit does not mean you should spend that amount.
Most lenders will want to see at least two trade lines (two types of credit in your name) with a minimum of two years established for each of those trades. Keep in mind this is the minimum. If you are reestablishing credit after a serious delinquency such as numerous late payments, consumer proposal or a bankruptcy, any lender or insurer will want to see strong evidence through your credit report that you are not going to fall into a situation again.
DEBT: A large amount of debt is not only expensive, but may also reflect poorly to another lending institution who is considering lending you a large sum of money. Unless your income to debt to debt ratio’s are low, carrying a heavy debt may be considered more risky as a lender will always be looking for your capacity repay further debt.
If the debt load on your card reports over the limit or pushing to 50% of the limit, this will negatively impact your credit scoring. In addition, amount of mortgage you qualify for will be impacted by the other debt obligations you have, as an income to debt ratio is what is also considered in qualifying for a mortgage, these are known as GDS and TDS.
In summary having established credit, a debt balance low compared to the issued limit and using credit on a consistent basis is the perfect recipe and presents far less risk to a mortgage lender.
At Mortgage Sisters West we offer advice, knowledge and our trusted expertise because our goal is to help you reach your goals. With the great relationships we have established with our lender partners and a vast portfolio of mortgage products , we can help you with your first purchase, to your retirement goals and everything else in between.
