Real Estate Talk | Unlocking the best mortgage rates

“I don’t care what the cost is!” said no one ever. When it comes to buying property, the cost of borrowing — that is your mortgage — can make or break the deal. In today’s economic climate, everyone is looking to save where they can. But here’s a little-known secret: You can actually lower your monthly mortgage payments by understanding and optimising the factors that influence your credit score.

Venturing into the real estate world, whether you are purchasing a cosy home, a bustling commercial property, or planning to flip houses for profit, your credit score plays a starring role in securing the best financing options. It’s no secret that bank mortgages are a popular choice for financing real estate deals. But, before you can start picking out paint colours, your financial institution will scrutinise your credit history — this crucial step heavily influences their decision to lend.

So, what exactly is a credit score, and why should you care? Simply put, a credit score is a numerical representation of your creditworthiness, determined by factors like your existing debts, payment history, credit mix, and more. Understanding how each of these factors impacts your score can help you snag the best mortgage rates and save thousands of dollars in the long run.

HOW TO BOOST YOUR CREDIT SCORE AND LOWER YOUR MORTGAGE RATE

PAYMENT HISTORY

As the saying goes “Timely return of a loan makes it easier to borrow a second time”. As a real estate investor, to avoid a negative credit history, you must have a clear understanding of your payment patterns and ensure timely repayment of your debts. Your payment history plays a crucial role in determining your credit score. Lenders will analyse this history to assess your ability to repay a new mortgage.

By effectively managing your payment history, you can enhance your likelihood of loan approval, secure favourable terms, and more. If you have a history of missing or making late payments, it can negatively impact your credit scores and, by extension, your ability to be considered creditworthy. If your credit score has already been impacted negatively, don’t worry too much, as you can still turn the situation around and improve your score by ensuring timely payments going forward.

EXISTING DEBTS

Your credit score is affected by the total sum of debt owed and your ability to repay the debt. To improve your creditworthiness for a mortgage application, it is important to make a detailed list of all debt accounts, clear closed loans from your report, and focus on clearing loans causing the most strain (i.e. those with the highest interest rates). Having multiple outstanding debts could hinder your chances of approval, limit your borrowing amount, and affect the interest rate that you are offered.

How can you manage these risks? Through close monitoring of your debt accounts, you can create a strategy to reduce your debt by prioritising balances with the highest interest rates. Having less debt improves your debt-to-income ratio, making you eligible for a larger mortgage loan. While decreasing your debt could result in a short-term decrease in your credit score since you will be managing less debt, making timely payments consistently on any outstanding debt will eventually raise your score in the short-to-medium term and enable you to preserve your creditworthiness.

CREDIT MIX

If you’re not always clear on accounting jargon, you may be asking yourself what exactly is a credit account. A credit account is an account established by a lender that allows the borrower to obtain funds now and repay them later. Three main types of credit accounts may be available to you as a real estate investor: revolving credit, instalment credit, and open credit. Revolving credit includes credit cards, personal lines of credit, and home equity lines of credit. Instalment credit refers to loans like student loans, mortgages, auto loans, and personal loans. An open credit allows borrowers to borrow up to a maximum limit but requires full repayment each month, such as utility bills and charge cards.

Demonstrating a mix of credit accounts and making timely payments shows financial responsibility to creditors. However, having too many credit accounts can complicate expense management and payment tracking. So it is best to avoid accumulating too many loans too quickly, especially as a first-time borrower, as this may negatively impact your credit score.

LENGTH OF CREDIT HISTORY

When seeking to secure financing from a lender, the duration of your credit history plays a crucial role in determining your credit score. A longer history, especially with positive payment records and no delinquencies, is advantageous. This includes the age of your oldest and newest credit accounts, as well as the average age of all credit accounts. Lenders may be concerned by a short credit history, as this does not provide as much insight into your credit behaviour. A longer history shows creditors that you can repay debt and are a reliable borrower. If you already have a well-managed, long credit history, you are on the right track to achieving a higher credit score!

NEW CREDIT INQUIRIES

Each time you apply for credit, it counts as an inquiry. If a lender does a hard inquiry on your credit report when you apply for a new credit line, it could impact your credit score. Hard inquiries are typically done by retrieving your credit report from one of the three main credit bureaus in Jamaica, which are EveryData Jamaica (formerly CreditInfo Jamaica), CRIF Information Bureau Jamaica Limited, or Credit Information Services Inc. Unlike soft inquiries, hard inquiries can cause a small reduction in your credit score. When applying for a bank mortgage, it is crucial to avoid making excessive credit inquiries if you are not sure that you will be accessing the credit, since it may signal that you are accumulating debt.

Now that you’ve demystified your credit score, you are armed with the knowledge to make smart financial decisions. By following these tips, you will be well on your way to securing the best mortgage rate, saving yourself a significant amount of money, and turning your real estate dreams into reality.

Daveyan Hill is an accountant at Proven Properties. Email feedback to realtalk@weareproven.com and lifestyle@gleanerjm.com.