Building Your Credit to Buy a House

Building Your Credit to Buy a House

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated May 8, 2018

Home-ownership continues to be a dream for most Canadians, but this goal is often out of reach for many who still struggle with a poor credit score. Most conventional lenders typically require a healthy credit score of anything over 680, though there are loan options available to those whose credit scores aren’t as high as they could be.

Lenders like to see high credit scores from borrowers because it is a direct reflection of a consumer’s payment behaviour. If your credit score is currently low, it’s likely due to the fact that you’ve missed some debt payments in the past. In this case, it may be difficult to get approved for a conventional mortgage because lenders consider consumers with a low credit score a higher risk.

That said, there are still ways to get approved for a mortgage, despite your low credit score. However, you should still take steps to improve your credit score in order to make it easier for you to get approved for a conventional mortgage – as well as other types of loans – in the future.

Here are some effective ways to build your credit to buy a house.

Pull Your Credit Report

The first thing you should do is pull your credit report. One reason to do this is to find out exactly what your credit score is, despite what you think it might be.

Click here to learn how you can get a free annual copy of your credit report.  

In addition, obtaining a copy of your credit report will give you the chance to see if there are any errors in the report that may be unfairly dragging your score down. If there are any errors, be sure to dispute them right away. These errors will be investigated, after which they will be rectified and reflected in a higher credit score.

Pay Your Bills on Time

It goes without saying that you should absolutely make every effort to pay all of your bills on time every month. Missing just one payment can bring your score down, which is likely why your score is low in the first place.

Need to rebuild your credit following a late payment? Try this.  

Making the effort to be dedicated and self-disciplined enough to meet your payment deadlines at each billing cycle can make a huge difference in your credit score. After a few months of making your bill payments on time, you should be able to see a noticeable increase in your credit score.

Leave Old Credit Accounts Open

If you have old credit cards that you’re not using all the time, don’t close them just yet. Many people wrongly believe that credit cards that are not being used on a regular basis should be cancelled. However, doing so can actually be bad for your credit score.

Curious to know how the length of your credit history affects your credit score? Read this.  

That’s because good credit accounts, that have been open for many years, can be very beneficial for your credit health. If you do have old credit cards, use them every so often – even if it’s just for a small expenditure – and pay the balance off in full so that these accounts stay active and help your credit score.

Don’t Open New Credit Cards

While you don’t want to close out old credit accounts, you also don’t want to open too many new ones. Doing so can cause your credit score to dip. Since these accounts are new, your credit reporting agency won’t have any idea how you plan to handle them. As a result of such uncertainty, you will be considered a slightly higher risk.

Look here to see how applying for new credit affects your credit score.  

Pay More Than the Minimum Balance

Many consumers only pay the minimum balance on their credit cards. Whether it’s because they don’t have the money or because they would rather keep some of that money for other purposes, not paying off the full outstanding balance can have a detrimental effect on a credit score.

Click here for more information about the minimum payment trap.

On the contrary, paying the full balance can have a positive effect on your credit score. Even if you can’t make the full payment, at least pay more than the minimum balance. Not only will it help with your credit score, it will also help you pay down your debt faster.

To know how your payment history affects your credit score, look at this.  

Don’t Spend Your Entire Credit Limit

Your credit utilization – which is the amount you spend relative to your credit limit – plays a big role in your credit score. If you spend close to your credit limit every month, your credit score will reflect poorly. Ideally, you should be spending no more than 30% of your credit limit every month. Doing so can help you gradually improve your credit score over time.

How does the money you owe affect your credit score? Find out here.  

Don’t Take Out Additional Loans

Now is not the time to take out a personal loan, car loan, or any other type of loan. When you’re trying to improve your credit, you don’t want to make things harder for yourself by adding more debt to have to pay off. Your goal is to pay down your debt, not add to it, so resist the temptation to take out a new loan until your credit score has reached the place you want it to be.

How Can You Buy a House With Bad Credit?

While there are plenty of things that you can and should do to give your credit score a boost, it’s still possible to buy a home with bad credit. Although conventional lenders will likely reject your mortgage application if your credit score is under 680, there are other lenders who work exclusively with borrowers who have bad credit.

Since your credit score is not a huge factor in the mortgage approval process in this case, alternative lenders will place more weight on other factors before approving you for a mortgage, such as your income and your down payment amount. If you have a healthy income and you save up for a hefty down payment, your chances of mortgage approval will be much higher.

If you’re wondering how to get a mortgage with bad credit, you’ll be happy to know that there are options available to you. But what about buying a house with bad credit and low income?

It is possible, though extremely difficult, as you will face many obstacles. For starters, it won’t be easy to come up with much of a down payment if your income is low, and not making a high income will make it more difficult to keep your debt-to-income ratio low enough to qualify for a mortgage. And combining that with a bad credit score will make things that much more challenging.

Trying to borrow money for a down payment? Read this to discover how.

Your best bet is to take steps to improve your credit score, which will make it easier to get approved for a mortgage even with a low income. However, you may also want to make some changes to help give your income a boost.

Final Thoughts

Having a healthy income and good credit is your best bet for improving your odds of mortgage approval. That said, there are many consumers out there who don’t have a high credit score but still need a mortgage to buy a house. If you have bad credit, take steps to improve it before applying. If you cannot wait, look to alternative lenders who work exclusively with low-credit borrowers.

Want to know what bad credit lenders look for when assessing loan eligibility? The answer is here.

Looking For An Alternative Lender?

Loans Canada can match you with an alternative mortgage lender in your area.

Rating of 4/5 based on 7 votes.

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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