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Determining Mortgage Affordability – Credit Score

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Determining Mortgage Affordability – Credit Score

There are numerous factors that lenders look at when determining how much of a mortgage you can afford. Here, we outline four key factors lenders look at when evaluating your loan application.

Think of your credit score as a grade in high school. The higher your grade, the more likely you are to get into competitive universities and colleges. The same principal applies to financing: the higher your credit score, the more likely a lender will approve your loan. This is because higher credit scores are seen as less risky to the lender. Your credit score considers a variety of factors, such as:

  • Payment History – this reflects the amount of your payments, the frequency of your payments, whether your payments are timely, whether you have missed any payments, etc.
  • Credit Utilization – this is the amount of credit you have used expressed as a percentage of the credit you have available to you. Lower credit utilization ratios are more favourable to your credit score. Credit utilization ratios below 30% are considered ideal. To calculate your credit utilization:

Credit utilization = (sum of credit used/sum of credit available) x 100%

  • Length of Credit History – the longer your history of making timely payments, paying back loans, and keeping lower credit utilization ratios, the higher your credit score is likely to be.

There are also other factors that impact your credit score, albeit to a lesser extent, such as the number of recent inquiries from lenders you have. When you apply for credit, lenders pull your credit report. This is called an inquiry. There are two types of inquiries – soft and hard. A soft inquiry does not impact your credit score, while a hard inquiry does. More hard inquiries signal to potential lenders that you may have money management issues or that you are being declined for loans, and thus generally have negative impacts on your credit score.