Buying a home is arguably the largest purchase you will ever make so, naturally, it will require extensive research as well as plenty of time and effort to be able to make a well-informed decision. If you are a first-time home buyer, trying to figure out what exactly goes into the process of buying a home can be overwhelming.
As you search through the internet for answers, one of the most talked about subjects when purchasing a home is your credit score. But what exactly is a credit score and how does it affect you during this process? Take a look below for a few tips and facts from Zoocasa on how important your credit score is when buying your first home.
Credit Score Basics
First things first - what is a credit score? A credit score is a measure of your credit worthiness and in Canada, generally falls within a range of 300 to 900. Lenders will use this as a way to determine whether or not they will extend credit to you and if so, how much they are willing to offer and at what rate they will offer it to you.
Your credit score is determined by factoring in a couple of different aspects. According to TransUnion, one of Canada’s credit bureaus, your credit score is calculated by placing numerical weights on different aspects of your credit file to get a final credit score. Some of these factors include the length of time in which your accounts have been open, your ability and history of paying your credit card balances and loans off, your credit use mix, and your credit usage compared to the amount of credit you have available.
What Do You Need to Buy a Home?
To be able to finance a home, you will need to provide a down payment and apply for a mortgage loan. In Canada, the minimum amount of down payment required for homes with a purchase price up to $500,000 is 5%. Saving up a larger down payment than what is required can help in reducing your monthly costs. Providing a down payment worth more than the minimum amount required will help to minimize the amount you need to borrow from lenders and in turn will also lead to lower monthly payments and interest rates.
What Does Your Credit Score Determine?
As you take a look at homes for sale in Toronto, it would also be a good time to take a look at your credit score and review it to get an estimate of what you can expect going into the process. When looking to purchase a home, your credit score will play a big part in determining who you can get a mortgage loan from, and how much they are likely going to charge you.
Generally, an average-to-good credit score falls around the high 600s to the mid 700s. Having your credit within this range will likely grant you regular interest rates on your mortgage loan from traditional lenders, such as big banks. Anything higher will also allow you to get approved for loans from traditional lenders but with lower interest rates and thus resulting in reduced total costs. On the other hand, having a score lower than the mid-600s may require you to look for unconventional lenders and will likely result in higher interest rates, monthly payments, and overall costs.
As you can see, your credit score plays a big part in financing for a home purchase. Having a good credit score will allow you to access better mortgage loan interest rates and help you minimize your overall costs in the long run.
Zoocasa is a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View real estate listings on zoocasa.com or download our free iOS app.