Purchasing a home is an overwhelming task made no easier by the technical jargon and real estate-specific terms. What’s more, buying a house with bad credit score and history can make it seem nearly impossible to get a mortgage. But did you know that there are bad credit mortgages? Your credit information may be a roadblock to buying a house in Canada, but there is a way around it.
What’s considered bad credit by mortgage lenders?
To qualify for the most affordable mortgage rates, you must have a strong credit score and history. A credit score of 680 or more is necessary to be eligible for the best mortgage rates in Canada in 2021 and beyond. However, some lenders may allow you to acquire property loans at favorable mortgage rates as long as you have a credit score between 600 and 680. Remember, the rates may not be as low as those of borrowers with higher credit scores.
You are probably wondering why mortgage lenders care so much about credit-related numbers. Property loans represent a huge sum of cash for financial institutions. Just like you would not lend your hard-earned cash to a complete stranger, lenders are not going to lend large sums of cash without vetting borrowers first. Credit history and score is one of the most effective ways banks and other financial institutions vet borrowers’ creditworthiness.
Excellent credit history and score show lenders your ability to meet your financial obligations on time. Having a higher credit score means more lenders will be willing to advance credit services at a significantly lower interest rate.
What do lenders consider when assessing mortgage or loan applications?
There are basic factors that nearly all lenders analyze when considering potential borrowers for property loans. While every financial institution will have a unique approval process for their property loans, here are some of the notable factors assessed during that process.
A borrower’s credit score plays a key role in the determination of mortgage rates. Indeed, this 3-digit number tells potential lenders nearly everything about your ability to pay bills and debts on time. As mentioned earlier, having a high credit score boosts your chances of getting the best mortgage rates. Failure to have the minimum required credit score could deny you a mortgage from banks and other lenders classified as A lenders.
Credit history and report
Keep in mind that your credit report and score will be under the microscope, particularly if you submitted your mortgage application to an A lender. Not only will potential lenders see who else you owe money to, but they will also have a highly detailed record of how you have been using credit products in the past. This will help them determine your creditworthiness.
Employment and income history
Lenders want to be sure of your ability to repay them, which is why your income and employment history can be as just as important as your credit report. When you apply for a mortgage, your financial records and employment history will be checked to determine the chances of you defaulting. Regardless of how much money you have saved in your bank account, an unreliable source of income or rocky employment history can make a lender question your creditworthiness.
Borrowers who make a higher amount of down payment are often considered more credit-worthy. Generally, borrowers with an excellent credit score are considered lower risk, and that means they can make as low as 5 percent of the property’s value as a down payment. On the other hand, borrowers with poor credit reports may need to make a down payment of 20 percent of the home value.
A mortgage is an expensive thing for a borrower to undertake, which why lenders examine a potential borrower’s debt history. That means unpaid car loans, credit card bills, or other high-interest debts may affect your chances of getting the best mortgage rates. After all, most lenders may not want to lend to someone who owes cash all over the city and has very little chance of paying what they owe.
The value of the house
This factor is mainly important for borrowers who are buying a house with bad credit and are working with private mortgage lenders. Once you find a property you wish to buy, it is recommended to have it appraised and ranked in terms of its value. If your preferred lender is skeptical of you (due to bad credit), they will need to be reassured that the home is worth the investment risk they will be making in case you default on mortgage payments.
Buying a house with bad credit
Though buying a house with bad credit isn’t going to be easy, it is still possible to get a property loan. The moment you realize that you have a bad credit score or have not enough credit history, don’t give up on your dream to own a home. Here are important tips for buying a house with bad credit.
1. Be patient
Taking the time to build your credit will work in your favor if you are searching for a property loan. Unless you must own a property within a very short time, it is in your best interest to focus on various ways of improving your credit score. Some of the common ways to increase credit score include paying your bills on time, keeping your old credit accounts open (but up-to-date), not using more than 30 percent of your available credit limit, and applying for new credit selectively.
2. Find stable employment
Suppose you have a great income and a good credit score; even when you are a commission-based worker or self-employed, you may still get approved for a mortgage. But if you have bad credit, recently filed for bankruptcy or consumer proposal, unstable employment (or no employment) history will add to the lender’s opinion that you may be a highly risky investment. One way of convincing the lender that you are creditworthy is to find stable employment.
3. Save enough for a large down payment
It is beyond doubt that you have decreased chances of securing a property loan with an A-lender if you have bad credit. However, one way of buying a house with bad credit is to save enough money for a large down payment. This can help you qualify for a mortgage with a subprime lender, and it is also a sign that you are doing something to improve your finances.
Paying a larger down payment shortens your mortgage payment period and makes the amount of monthly payments smaller, amortizing your high-risk property loan over a long period. Note that buying a house with bad credit is possible if you can save enough money for a large down payment.
4. Get a joint mortgage or a cosigner
Suppose you want to get a mortgage and you do not have the time to save enough money for a larger down payment or rebuild your credit score. In that case, you could get a cosigner. Keep in mind that your cosigner promises to make the necessary mortgage payments if you are unable to do so. Generally, a cosigner makes it easier to qualify for a mortgage from A-lenders or traditional lenders because as long as the cosigner’s credit and income records are outstanding, they can be used for qualification purposes.
For this reason, you should choose a person with a high income, records outstanding credit score, and not a lot of debt.
5. Use alternative lenders or private mortgage lenders
In case your credit score is below 600, you are likely to find it difficult to get approved for a mortgage from Canada’s major banks. Your best bet is to work with a private mortgage lender or an alternative lender. These lending institutions are more lenient when it comes to credit history and credit score. However, you will need to make a hefty down payment raging between 20 percent and 35 percent of the property value. Interest rates are often higher with private mortgage lenders.
It is important to mention that private mortgage lenders may charge extra fees compared to traditional lenders. For instance, a private mortgage lender might charge a loan processing fee of approximately 1% of your mortgage loan’s value. In case you found this private lender through a specialized mortgage broker, you may be asked to pay the broker a finder’s fee of about 1%. This extra 2% in fees can turn out to be a substantial cost, particularly if you want a mortgage of $300,000 or higher.
Private mortgage lenders often make the entire process of buying a house with bad credit easier.
Finding the best bad credit mortgage lender
If you are buying a house with bad credit, you already know you have fewer chances of qualifying for a mortgage from traditional lenders. In this case, you can either take the time to build your credit score or find a cosigner. If this is not possible, do not give up on your dream to own a property.
There are other routes you can take if you are buying a house with bad credit. Begin by saving enough money for a large down payment and work with a licensed mortgage broker to find a reliable alternative lender. A good broker can save you effort and time because they have access to different private mortgage lenders. He or she can also help you compare lenders and choose the most competitive mortgage rates.
Buying a house with bad credit is possible if only you understand your options. Depending on your financial situation, you can work towards building your credit score, find stable employment, save enough money for a large down payment, find a cosigner, or work with a private mortgage lender. It is recommended to consult with a reputable mortgage broker if you are buying a house with bad credit.