No institution will give you a mortgage on your verbal agreement to repay the loan. Lenders have a few ways to assess your financial situation and determine whether you're a good risk or not. And one of the most important tools to gauge that is your credit history.

Good credit is crucial

A credit history is a report by credit bureaus used by most organizations that lend money. The bureaus collect consumer information, including personal data, loan and payment information, and then summarize the information into meaningful reports. Moreover, these bureaus generally assign each of us a rating based on how timely we pay our bills.

Every day, lenders decline myriad mortgage applications based on bad credit reports. For example, a missed $100 payment on a student loan may result in a rejected mortgage application. Although the missed payment may have been due to frequent moving after graduation, the lender still may opt not to approve – with a higher interest-rate mortgage as the only other option.

Report data

Credit reports include many pieces of information, including name, address, previous address, social insurance number, employment, outstanding loans, loan limits, credit card debt, frequency of payment; bankruptcy history, government security registration, court judgments; lender inquiries and, of course, your credit rating or score.

But the real red flags for prospective mortgage lenders are the following:

• Late payment
• Non-payment
• Bankruptcy
• Current debt level
• Length of credit history
• New loan applications
• Types of loans used

The score

Almost all lenders review your credit score before giving you a mortgage. Some lenders may use your score to determine if they want to spend any time on your application. More than 60 per cent of people have a score of 681 or above.

If you have a score of 650 or more, you have a good credit rating, considered to be one of your best assets. With it you will be able to get a loan relatively easily with preferred rates. If your score is below 600, you are considered a higher-risk investment.

Late payments, and timing and frequency of late payments negatively affect your score and ultimately determine your credit worthiness. For example, late payments that happened four or five years ago would be better than a more recent late payment. A written-off loan will surely generate many questions and doubts from lenders. This is why you need to take good care of your credit activities.

Tips for good credit

Establish credit early.  Get your credit card early and know how to use them. When you borrow money, you automatically establish a credit history with the credit bureau. A line of credit is considered a better record than a credit card loan.

Pay bills on time. For your monthly payments such as rent, personal loan, phone bills and credit cards, you must pay them on time. If you cannot pay the full amount, always aim to pay at least the minimum.

Never borrow more than your credit limit. If you have borrowed more than 85 per cent of your credit limit, the banks will feel that you need to improve your money management skills.

Do not apply for many loans or conduct credit checks frequently. This only creates an impression that you need to borrow money without planning. 

Complete loan applications carefully. Credit bureaus record your application information into your credit file. Incorrect names, birth dates, social insurance numbers all affect the integrity of your credit file and may cause problems when applying for a mortgage.

Get your credit report annually. Know your history so you can correct any errors your report may contain. Contact the credit bureaus and the organization that submitted the record for any errors you find. The bureau will investigate with the submitting organization to resolve the issues.

You can get your credit report online (for a fee) or by snail mail (free) from the following credit bureaus:

Martin Shao is the president of Valueland Mortgages. Forward your mortgage questions to mshao@valueland.ca or visit his website valueland.ca

Originally published in Real Estate News by Star Media Group on Nov. 23, 2007.