Dear Jeff,
My wife and I have been saving our money for a down payment on a home. We are close to reaching our goal and are about to embark on our house hunt. We’ve done some research and are wondering about how to have credit figures for buying a home. Money is tight, so we have always lived by a cash-only lifestyle because we really didn’t want to carry the expense of debt.
I thought not carrying debt was a good thing? Could our lack of credit hurt our chances of buying a home?
Peter S
Regina, SK
Hi Peter,
I always say that the best way to avoid getting into debt trouble is to avoid taking debt out in the first place. So you are using good money management habits by using cash and savings instead of relying on credit.
When it comes to buying a home, the criteria are a little different. A mortgage loan is usually a substantial amount of money. So the lender has to be able to gauge their risk when lending money to you. While the debt is secured against the value of the home, they need to be able to determine the likelihood that you’ll be able to make your mortgage payments.
They look at a number of factors. But most importantly are your level of income (i.e. how comfortably can you afford these payments) and your credit history. Your credit history actually carries the most weight in determining your credit score. Because as they say, past behaviour is usually a pretty strong indicator of future behaviour.
Credit scores are usually brought down by late payments, maxed-out credit cards, a lack of experience with different credit products and a few other factors.
Unfortunately, in your circumstance, your credit score will be low because you don’t have a credit history for the lenders to refer to. If your credit score is too low you may not qualify for the mortgage at all. Usually, the low point of qualification is about 680 for traditional lenders. If your score is in the middle range, you will be likely looking at paying higher interest rates. This way the lender can reduce their perceived risk. If your score is in the middle range, you will be likely looking at paying higher interest rates. This way the lender can reduce their perceived risk.
The good news is that having no credit history is a problem that is easily solved. Therefore, you should include this as part of your home-buying strategy as you continue to save money for your down payment over the coming months.
Take out a small credit card and make strategic purchases every month. Pay the balance off in full. Consider taking out other types of credit to show your lender your ability to budget for various types of payments. A good option here is an RRSP loan because you’ll be building your savings at the same time and depending on your tax situation, you may get a refund, which you can pay down the loan with.
This may take some time to accomplish, but stay the course and you’ll get there. The other good news is that you’ve already demonstrated that you can spend within your means in your cash-only lifestyle and that you understand the importance of savings. Both of which will be very useful when you become a homeowner.
Jeffrey Schwartz
Executive Director
Jeffrey Schwartz is the Executive Director of Consolidated Credit Services of Canada and Former President of the Credit Association of Greater Toronto (CAGT).
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