With certain loan programs and a variety of lenders, it may be possible to get a mortgage with bad credit, particularly if you can make a down payment, have a low debt-income ratio, and prove that you have a large cash reserve.
Your credit score is a crucial part of your overall financial situation and has a significant impact on your mortgage decisions. It tells lenders whether or not you’re capable of paying your date. Having a high credit score is ideal, but most Canadians often encounter credit issues due to no fault alter your own, whether in job loss, global pandemic, or illness. Since a credit score takes a long time and effort to improve, such setbacks could make purchasing a property more challenging for an extended period.
Not everyone with a bad credit score can wait for that long. Most people have all their ducks in a row and may be ready to take the property ownership plunge, except for having bad credit. Fortunately, there are other ways to get a mortgage loan, even when you have a bad credit score. The bad news is that these alternative mortgages don’t usually come cheap. Here are tips on how to get a mortgage with bad credit score.
What’s a credit score?
A credit score refers to a number between 300 and 900 assigned to a person by the credit bureaus in Canada. This number tells lenders how you have been dealing with available credit in the past. Having a high credit score means you have been handling your debts positively and could help you qualify for the lowest mortgage rates.
A credit score below 599 is considered poor, while credit scores ranging from 600 to 679 are considered fair. And a credit score that is above 680 is considered good. When you apply for lines of credit, including a mortgage application, your prospective lender will perform a credit check on you with TransUnion or Equifax – the two major credit bureaus in Canada. The lender will use the results (credit reports) of that credit check to determine if they should lend you money.
The cost of a bad credit property loan
The reality of having bad credit when submitting your mortgage application is that many mainstream mortgage lenders will not approve it, particularly if you have a credit score of 600 or less. As mentioned earlier, your credit score represents your level of risk to the lender. Having a bad credit score means you’re more likely to have a history of not making payments on time. That means you’ll be forced to take a loan from lenders that offer higher mortgage rates.
Suppose you apply for a mortgage from a private lender when you have a credit score <600. In that case, you are likely to be charged a 10% to 18% interest rate, while another person with a good credit score applying for this same mortgage from a major bank is likely to be charged a 2.54% interest rate. Mortgage interest rates have a direct impact on the amount of monthly payment you will be expected to make.
Get a mortgage with bad credit.
Suppose you’ve checked your credit score, and it does not look good. What should you do? Don’t panic. Here are tips to help you get affordable property ownership in no time.
1. First things first – improve your credit score
Having a higher credit score is beneficial as it helps you secure mortgages with a lower interest rate. This results in a low monthly mortgage payment. So, if you checked your minimum credit score and disqualifies you for a mortgage from banks, your best shot to get a loan from such lending institutions is to improve your credit score. Here’s how;
Pay all your bills on time: Do not miss a monthly payment on any of your utility bills. This is particularly important for various debt payments such as credit card debt and student loans. It also applies to various utilities and your cell phone bill. In case you cannot pay your bills in full, don’t ignore them. Instead, contact the provider and negotiate a better payment plan.
Stay within your credit limits: Do not use more than 30% of the available credit limit across your lines of credit, and that includes credit cards. This will show credit reporting agencies that you can be considered a responsible spender and not a spendthrift.
Don’t apply for excessive new credit: Do not apply for many credit cards because this may be considered a red flag to credit reporting agencies. It could mean that you’re desperately looking for more credit.
Keep your old accounts: The length of your credit report history matters. That means canceling all your old credit cards eliminates them from your current file and could shorten their entire credit history. So, keeping your old credit cards open (even if you don’t use them) will maximize the length of your financial history and credit reports.
If you apply these financial tips, you’ll see your credit score increase over a few months. But if you need a mortgage loan urgently, this strategy may not work. Perhaps you can explore other ways to get a mortgage with bad credit.
2. Save enough cash for a down payment
Most lenders analyze more than just your credit history when considering your mortgage loan application. They also look at other factors like the debt level, available cash for a down payment, and your income. In Canada, the expected minimum down payment ranges from 5% to 20% of the property’s purchase price. In case you have a credit score that is less than ideal, your prospective lender may ask for a higher down payment.
Consider saving at least 20% to 25% cash for a down payment, particularly if you’re trying to get a mortgage with bad credit history. This will signal that you are financially stable enough to finance a property purchase and could also lower your monthly mortgage payment. A larger down payment also means that you don’t need a mortgage default insurance policy. This insurance policy is a requirement for most Canadians acquiring a mortgage with a down payment that is less than 20%.
3. Find a bad credit mortgage lender
All borrowers need a minimum credit score for mortgage application approval from big banks, and that number is 600 or more. Increase your credit score is below that level many big Banks in Canada will not approve you for a property loan.
But this isn’t the end. You can still find a subprime lender such as a trusted company that works almost exclusively with borrowers who have a bad credit history. If you have gone through consumer proposals or bankruptcy in the last two years, it is recommended to work with a private mortgage lender. If you choose to work with a credit mortgage broker, he or she should be able to help you find a private mortgage lender.
4. Consider a joint mortgage or a co-signer
Another way of getting a mortgage with bad credit is to have a co-signer on your loan contract. A co-signed mortgage usually brings on a third party as a guarantor of the loan. The co-signer promises to handle your monthly mortgage payments in the event that you can’t make such payments. Getting a co-signer, particularly with a good credit score, will help you get better mortgage rates because he or she is essentially considering a co-borrower. So, the co-signer credit score and income will also be considered in the mortgage application and approval process.
5. Get ready for the next renewal
With the possibility of getting turned away by banks, it might seem like there is no good option for acquiring a mortgage with bad credit. However, there is some good news. A bad credit mortgage is renegotiated at the end of a specific term. In most cases, that term is 5 years. This is plenty of time to improve your overall credit score and financial situation.
There are many options for Canadians seeking a mortgage with bad credit scores. However, getting a mortgage from private lenders is quite expensive, which results in high monthly mortgage payments. Building your credit score remains to be the best strategy to get good mortgage rates. And even if you must take a mortgage with bad credit, take the proper steps to rebuild your credit score.
If you plan to get a mortgage with bad credit, consult with Gord Davis – one of the reputable mortgage brokers in Ontario.