Debt is an uncomfortable topic to discuss and for many it is a constant factor that deteriorates their quality of life. Debt is a factor that is extremely important to consider when analyzing the ability for Canadians to purchase their home. As debt is considered in the calculations for how much of a mortgage you can qualify for, it is an extremely important topic for us to cover.
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As debt has an impact on your total spending power, sometimes it is smarter to wait when you wish to buy a home and instead choosing to pay down any outstanding debts you currently have. By paying down debt and taking time to save up for a larger down payment, you will be able to qualify for an even better mortgage than you initially thought.
We strongly recommend the snowball and avalanche strategies for paying down debts:
The debt avalanche strategy states that you should pay down the highest interest debt you have first so as to have more available money (that you save in high interest expenses) to pay down the lower interest debts, therefore minimizing the time needed to pay down debt. Though the avalanche strategy is the most mathematically effective, it does not take into account human psychology. Because progress is much more difficult to see in the short run, people are more likely to quit paying off their debts from lack of motivation.
The debt snowball strategy instead has you pay down the debt with the lowest balance first, thus you will see tangible progress more quickly as you receive less bills every month after paying down your first balance. Though this strategy is less mathematically effective than the avalanche strategy, it does help motivate people to pay down their debts and continue with the tangible progress they see.
As both strategies are very useful for paying down debts, we at Blink recommend finding the method or mix of methods that work best for you in your life so your credit improves and you can qualify for a mortgage.
Credit bureaus (scores) in Canada are determined by five factors:
Your credit score can be anywhere from 300 to 900. A credit score of anywhere from 680 to 900 means that your credit is in anywhere from good to excellent standing, and applying for new credit will be quite easy. Credit from 600 to 680 means that you will likely have to use a B-lender which means that the rate you receive on a mortgage will be much higher as you are a riskier bet for the lender.
Credit scores that range from 300 to 600 are typically not eligible for a mortgage until they are improved.
The best way to ensure that you are eligible for a mortgage is to maintain good credit, and we want to give you a few tips on how you can.
The number one thing you can do to maintain good credit is to make all payments on time. Payment history reflects 35% of your credit score and missed payments have a major effect on whether or not you qualify for your mortgage. Missing a payment will negatively affect your credit score for a MINIMUM of two years.
Paying down the principal on high interest debts will help increase your credit score and reduce interest expenses. It is important to make sure that you are making all minimum payments as missing a payment is a surefire way of depreciating your credit score.
One often overlooked item that can affect your credit score is having your credit pulled multiple times in rapid succession. Having your credit bureau pulled too often will negatively affect your score and result in a decreased ability to access credit.
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