July 26, 2019 Kristen Godel

The Power of Credit

We often hear the importance of credit when it comes to borrowing, especially when it comes to mortgages. Major banks and institutions of all kinds, relay on a borrower’s credit rating/history in order to assess the risk they would face in extending some form of credit to that specific borrower.

Although there are mortgage lenders that would help assist home owners regardless of their credit, the difference between excellent and poor credit could determine a corresponding difference in purchasing power. More specifically, those with excellent credit can purchase a home with as little as a 5% down payment, while those with poor credit would need at least a 20% down payment. To illustrate how this can lead to a difference in purchasing power, see the following example:
**For the purposes of this example, we will assume that the income is enough to qualify for the necessary mortgage at the particular price point
A young couple earning a family income of $120,000/year is ready to buy their first home. They have managed to save a down payment of $30,000 and are interested to find out their maximum purchase price
.

In this example, if the borrowers’ credit is excellent, their down payment can represent 5% of the purchase price. This means that the maximum purchase price that they can attain is $550,000 with a down payment of $30,000. On the other hand, if the credit is poor, the same $30,000 would need to represent at least 20% of the purchase price. This means that the maximum purchase they can attain with poor credit would be at a price of $150,000.

As you can see, the difference between the two scenarios, from a credit standpoint, is a huge difference. The same $30,000 can go much further, or has much more purchasing power, when the credit is considered ‘excellent’, while with poor credit, it is significantly reduced.

Having said that, everyone has different circumstances including credit, income, down payment, etc. If you would like to discuss your personal situation to determine the best way to purchase your home, please don’t hesitate to reach out to us today! (905) 455-5005.