April 26, 2018
                            No. 217
What it takes to get into home ownership today (Part 2)
Last week we discussed what level of income you need to get into home ownership in this tough market. Of course, if you have a big stash of cash, then you can buy property up to that amount of cash.

Most people don’t have that, however, and need a mortgage in order to become homeowners.

We considered the scenario where you have 10% available for a down payment and need to mortgage the rest. In that scenario, as a rule-of-thumb in today’s market, you can afford a property valued at about 4.25 times your gross annual income.

The next thing is, that to qualify for a mortgage on that property, you will also need to convince the lenders they can trust you to pay back that mortgage. That trust is basically determined by your credit score and report.

Credit scores range from 300 (very bad) to 900 (very good). Most people have relatively good credit, falling within the 600s and 700s. If you fail to pay your bills on time though, get a collection or judgement against you, have a bankruptcy, have too much credit utilization, or even too limited credit, your score may be much lower.

How high a credit score do you need to get a mortgage?
There is no clear-cut answer as to how high a score you need. It varies somewhat with market conditions and with regulations imposed on the industry by government authorities. It also depends on how much of a down payment you have. Finally, it depends on the type of lender you use.
Let’s talk first about the last point, the kind of lender. There are A-lenders: the Big five banks, credit unions and some mortgage companies. 

These are the primary lenders, the ones that charge the lowest interest rates and the ones you will try first to get a mortgage. 

Then, there are B lenders, those lenders who specialize in providing mortgage to substandard clients. They will accept you with lower scores but charge higher rates and require larger down payments. And finally, there are “hard money lenders,” who will go even beyond the limits of the B-lenders, but at a very steep cost.

For this analysis, let’s stick to the A-lenders. Officially, to qualify for a mortgage with less than 20% down, you need a score of 600. However, that is the official minimum threshold; most likely you will need a credit closer to 680, and with only 5% down, it may need to be higher yet.

Qualifying is not automatic just by attaining those scores. The lenders will also look at what types of credit you have, how much your limits are, and the length of time over which you have utilized a particular credit line. 

They will definitely want you to have a credit card (revolving credit) and show responsible use of that card: no late payments, and no maxed out limits.

That card will need to have at least a $2000 unsecured limit. Even then, it may depend on whether that card is a quality credit card or a second-rate card. Credit cards from the “Big five” banks are considered the most credible, but they are also the toughest to get and to achieve high limits. The cards more easily gotten are considered less credible but are often the ones you need to start with when you are trying to build up your credit from a low score.Then, they also prefer if you show several kinds of credit. While revolving credit is best, if your other credit lines show variety of credit types, such as “installment” or even ”retail” credit, then you demonstrate a broader level of responsibility, which, of course, they like to see.

Your credit cannot be brand new, either. Generally, lenders will want you to have had at least two credit lines for at least two years, though there may be some flexibility if your best credit line is high and of longer term.

Also, if you have some negative influences on your credit, such as a delinquency in payments, collections, consumer proposal or bankruptcy, then lenders will require a certain passage of time before approving you for a mortgage, even if your score is otherwise adequate. A late payment may be required to have aged a year, whereas a bankruptcy discharge or consumer proposal payout may be required to have aged several years. If real estate was included in a bankruptcy, you may be required to wait seven years. And if you’ve had a second bankruptcy, forget about a mortgage for 14 years.

Being credit worthy for a mortgage is far from an exact science. Learning how the banks think, however,  can help you to take the steps necessary to reach the score needed to get you approved for a mortgage. 

You should check your score and report from time-to-time, to ensure that you are doing the things necessary to build or maintain your credit worthiness, and to correct any errors that occasionally find your report.