How to build credit to buy a house?

If you’re interested in saving for a down payment for a home in the next few months or near future, you’ll want to check in on your credit score. Most lenders in Canada require a minimum credit score of 680 to get approved for mortgage financing. But getting a good credit score won’t happen overnight. It requires dedication and patience.

Here’s what you need to know about your credit score, how to access it, why mortgage lenders care about it, and how to improve it.

Why Do Mortgage Lenders Look at Your Credit Score?

Lenders look at your credit score as a snapshot of how you manage your money. Your credit report tells them if you make on-time payments, pay your bills in full, and generally manage credit responsibly.

While credit reports don’t always offer a holistic view of your finances, they can show lenders red flags that may indicate you’d be a risky borrower. For instance, if you have bills that have gone to collections or a history of late payments, a mortgage lender might worry you’ll also default on your home loan payments.

How a Good Credit Report Can Help Your Home Search

When buying a home in Canada, the Canada Mortgage and Housing Corporation requires at least one borrower or guarantor to have a credit score of 680 or higher. A 680 is considered a good credit score, which indicates you have a strong history of on-time payments.

Your chances of getting approved for a mortgage are even higher if your credit score is above 680. And if your score is above 760, which is considered excellent by credit bureau Experian, your chances of getting approved are even higher.

If you have a higher credit score, you can typically secure a lower interest rate on your home, which can save you tens to hundreds of thousands over the lifetime of your mortgage. Locking in a low mortgage rate is particularly important in today’s rising rate environment.

How to Build Credit to Get a House

Before you start working on your credit, you need to know what score you’re starting with. Some credit cards offer access to your credit score, but you can also request a copy of your credit report from either of Canada’s two credit bureaus, Equifax or Transunion.

Once you have your credit profile, review it for any derogatory remarks like late payments. Focus on catching up on any past-due bills, and enroll in autopay to prevent yourself from missing a future payment.

From there, you can work to pay down any outstanding balances on credit cards in good standing. If you’re debt-free, it might be time to consider adding another credit card to the mix to help boost your credit score. A new line of credit can increase your credit utilization, which accounts for 30% of your credit score. Additionally, making on-time payments across multiple credit products can help raise your score even more.

Ways to Reduce Debt Before Buying a Home

Even if your credit score is in good shape, you’ll want to focus on paying down as much debt as possible before applying for a mortgage. Mortgage lenders consider the debt you hold when making borrowing decisions. Most lenders require a total debt-to-income (DTI) ratio (your monthly debt payments compared to your monthly income) of 35% or less, though some lenders may approve you with a DTI of up to 41%.

You want to lower your monthly debt payments so that your income far exceeds your debts. Otherwise, a lender may worry that you don’t make enough money to pay off your other debts in addition to a new home loan.

There are different methods you can explore for paying down your debt, including:

• The debt snowball method: Using this strategy, you’ll make the minimum payments on all of your credit accounts, and put extra money towards the smallest debt balance. Once you pay this off, you’ll target the next smallest balance, and so on. This allows you to see small debt wins as you close accounts by gradually focusing on larger amounts.

• The debt avalanche method: With this method, you’ll pay the minimum on all of your monthly debt accounts and put more money towards the debt with the highest interest rate first. The method can save you the most in interest payments, but it may take longer to see small wins.

• Increasing your income: If you’re able to, consider finding ways to boost your income by taking on part-time or gig work as a short-term solution to pay down your debts.