If you plan on buying a condo, you’ll want to put yourself in the best position possible by having your finances in order (also, you won’t want to forget the condo insurance). Most potential condo buyers will naturally focus on their down payment and their debt load, but one aspect that some people forget about is their credit score. This number can have a significant impact on a condo purchase, which is why you want to make sure you understand your credit score and also know if it’s in good standing. 

What is a credit score?

Your credit score is a number between 300 and 900, which shows how creditworthy you are. This is relevant for home buyers, as they’ll likely need a mortgage to complete the purchase. When going through the mortgage application process, lenders will check your credit score. The higher your credit score, the more likely you’ll be approved for a loan.

Don’t worry if you’re new to credit scores. If you’ve ever had a credit card, a loan, or even prepaid services such as a wireless product, you likely already have an established credit history.

For reference, credit score ratings are typically as follows:

●      Poor: 300 - 579

●      Fair: 580 - 669

●      Good: 670 - 739

●      Very Good: 740 - 799

●      Excellent: 800 – 900

How your credit score impacts a condo purchase

Since a mortgage is a loan, lenders will rely on your credit score to determine how likely you are to repay the loan. If your credit score is in poor or fair standing, then the chances of you being approved for a mortgage greatly decrease. And even if you’re approved, the rates you’re offered may not be very good as the lender may consider you a risky client.

On the other hand, say your credit score is in very good or excellent condition. In this situation, you’ll likely have no issues getting approved by multiple lenders. Additionally, since you have a good credit history, you might be approved for the best rates possible.

How to improve your credit score

If your credit score is currently in poor or fair standing, you are advised to try to improve to a minimum of good standing before you apply for a mortgage. Some things you can do to improve your credit score include:

●      Lower your credit utilization ratio: Your credit utilization ratio is the amount of credit you’re using relative to your total credit limit. For example, if your total credit limit is $10,000 and you regularly have a balance of $4,000, your credit utilization ratio is 40%. Ideally, you want to keep your credit utilization ratio below 30%.

●      Be in control of your payments: Always make your payments in full and on time. If you can’t make the full payment, pay at least the minimum to maintain your credit score.

●      Monitor your credit: Check your monthly bills to ensure the charged purchases are yours. If you don’t recognize a transaction, contact your credit card provider right away in case there’s fraud or identity theft. The last thing you want is fraudulent charges affecting your credit score.

●      Limit your activity: Whenever you apply for new credit, your credit score drops by 10 points. Avoid any unnecessary credit inquiries to keep your credit score up.

Getting a mortgage with poor or fair credit

Even if you have a poor or fair credit score, it’s still possible to get a mortgage. First, check with a mortgage broker who can shop around for you. They may have access to lenders that don’t put as much emphasis on credit scores during the approval process. That said, even if approved, you may not get the lowest rates available.

Another option is to get a co-signer on the mortgage. This is a simple solution for those planning to buy a condo with their partner. Since lenders would look at the two of you together as a single application, you could potentially still be approved. However, since both credit scores are still a factor, you may only get approved for a lower amount.

Other financial essentials when buying a home

When going through the condo-buying process, you’ll want to ensure your financials are in place. By having everything ready, it increases the chances of getting approved for a mortgage. Some things to prepare include:

●      Your employment status: Make sure you have steady employment with a solid income. Lenders will consider your salary to determine how much of a mortgage you’d be approved for.

●      Your down payment: The minimum down payment for homes under $1.5 million is 5% of the first $500,000 plus 10% of the remaining amount between $500,000 and $1.5 million.

●      Reduce your debt: Lenders will look at your debt-to-income ratios during the evaluation process. In most cases, your ratio toshould be below 36% for you to be approved.

●      Get pre-qualified: A pre-qualification does not affect your credit score and can be on most bank and mortgage websites. It’s just a quick check to see what you’d likely be approved for.

●      Get your credit report: Both Equifax and TransUnion allow you to order a detailed credit report for free so you can check your history.

Final thoughts

Your credit score is an important factor that will affect your chances of buying a condo. Maintaining your credit score is essential, so make sure you check it regularly to ensure there are no irregularities.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.

Barry Choi is a paid spokesperson of Sonnet Insurance.