Mortgage Blog

Is Your Credit History Good Enough? You Might be Surprised!

June 29, 2015 | Posted by: Kelleway Mortgage Architects

No credit or light credit history can negatively affect your ability to borrow even if your credit history has never been bruised by past borrowing behaviour.

No credit.  There are those who are proud to say “I pay everything with cash or debit” or “I always use debit cards or cheques rather than credit cards” or “Why do I need a credit card when my spouse has one?”  That’s admirable for managing your monthly cash flow...not so much for establishing a good enough credit history!

Lenders review your past credit history when they review your application for a mortgage.   Therefore, when you have never made a monthly payment for purchases made on credit, how will they know you will make regular monthly payments on your mortgage?  Even though you are impeccable in paying amounts you owe without using credit, your application for financing may be denied due to lack of credit history  - and that may seem unfair to you.   Nevertheless, that is the way it is when  it comes to people loaning you money, especially when you have only 5% to 10% of the purchase price available for down payment.  As  a first time buyer, lenders may be reluctant to risk approving your “first time ever loan!”

Here’s what we suggest.  Apply for a common credit card and start using it on a monthly basis.  Set your credit limit to a minimum of $1000, and keep your spending or month-to-month balance to less than half of your credit limit.  If possible, pay off the balance every month after you receive your statement either online or in the mail.  You will then accumulate little or no interest and carry a small or no balance into the next month.   In the process, you are establishing your credit history behaviour.

If you do not want to carry a credit card to make retail purchases, then try this strategy.  If you have a mobile phone, choose to pay off your monthly bill with a pre-authorised payment from your credit card. (Perhaps one that also earns you reward points?)  Then, with that same credit card company, arrange to have your monthly credit card balance ( or at least your minimum monthly payment) automatically paid from your bank account.  All you need to remember each month  is to deposit enough money in your bank account to cover that mobile bill payment.  These days, you can manage that entire process all online, even from your smart phone!

Light Credit.  Those with light credit may say...“I only have a credit card for emergencies, I hardly ever use it!”  Or, “I got a credit card just to establish a credit history but I keep the limit at $500.” Or,  “I have one credit card, isn’t that enough?”

Most major financial institutions (i.e., banks or credit unions) like to see that mortgage applicants have at least two active credit accounts in order to qualify for minimum down payment  mortgages that are default insured.   Those accounts could include a credit card, an auto loan and/or a personal line of credit.  Keeping two or more accounts in good standing for 2 years will usually place borrowers in a stronger position when qualifying for mortgages requiring only minimum down payments.

If you are light on credit history, you may need to strengthen the “equity” corner of your qualifying square by providing more equity or down payment (i.e., more than 5% or 10 %) towards your real estate purchase.

Bruised Credit.  “Bruised” credit does not mean “bad” credit, it refers to a less than perfect credit history. 
For example, perhaps there was an issue that arose with a missed payment, or maybe two or three payments were missed while you went on vacation?  We’ve seen bruised credit result from people moving and not leaving a forwarding address for their last utility bill.  That unpaid bill ended up with a third party collections agency!

Some people don’t bother paying off a minor balance on their credit card and that can drag down their credit rating.  Whether it’s $5 or $5000 left hanging, the computer  for credit reporting will calculate any unpaid amount as a debt in arrears.

Or, sometimes people have set their credit limits too low and are continually maxing-out or overspending their credit limits even though they make regular payments on time.  (A rule of thumb is to keep your month-to-month carryover balance below half your credit card limit).  
Maybe there is an issue lingering from a jointly held credit card that is still tainting your individual credit history – even long after the relationship has ended?  Oh, and if your debt involves the Canada Revenue Agency (CRA) for unpaid taxes – we advise you pay first and dispute later when appropriate. 

Whatever the reason and depending upon the circumstances, after the account in question is brought up to date or the balance paid to zero, your credit history should return to good enough standing within a year of the matter being settled.

What To Do if You Have No Credit, Light Credit or Bruised Credit.  Take a deep breath, relax and talk to us.  As long as your household income can manage the regular monthly payments for the mortgage,  we can seek a lender who is willing to grant you a mortgage.   Often, we can arrange the best terms for you by asking if someone (preferably a close family member) can co-sign the mortgage with you.  In effect, you are promising to pay the mortgage and the co-signer is promising to pay the mortgage if you cannot.

Of course, regularly paying the mortgage payment in full and on time yourself is in your best interest to help establish and/or strengthen your credit history.  Within a year or two of the mortgage funding, and by following some specific advice, we can review your credit history again and in most cases release your co-signers from any further obligations to you and the lender.

What's the Next Step for You?
1)    Keep us in mind and on hand in case anyone you know runs into the same sort of situaltion.
2)    Share this post with your friends and family because you never know when the info could come in handy.
3)    Call or Email Us just to connect and get started talking about your plans. (see below)
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Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner

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