You’ve had a few financial challenges, but now you’re on the right path and are ready to consider home ownership. Your only problem is to make sure that the past obstacles reflected in your credit history won’t prevent you from getting a mortgage. The good news is that there are lenders out there providing divers; but they don’t come cheap.
Here are a few steps you can take when you need a mortgage with poor credit.
1. Start from getting a comprehensive check of your credit score
You can become a member with either Equifax or TransUnion in order to get an immediate online report of credit score. When you pull your own report, your score is not affected. Your other choice is to connect with a mortgage broker and get them to check your credit score for you. If you do this too many times in a short period of time, or if you have it done by a few institutions simultaneously, your credit score may go down. Please note that your credit score will quickly return to where it was in after the inquiry. You should have a credit score above 700 if: you pay all of your bills on time; don’t use your credit over 60% of its limit; have zero bankruptcies; have no consumer proposal or disputes within the past two years. Any credit score above 700 will allow you to access mortgages with the best rates, and anything less than 680 calls for additional actions.
2. I do have a bad credit and I want a mortgage. Where do I go?
In three words: come to us. When your credit score is above 700, we can get you a mortgage from any one of the banks, credit unions, and trust companies that we work with. When your credit score is in the range of 680-700, there are some institutions and banks that will treat you as if you have 700+, but your choices will be more limited. A score under 650 will open more expensive choices, but you’ll be able to negotiate and choose between them. If, on the other hand, you have a credit score below 600, most of Canada’s large banks will not be able to approve you for a mortgage loan at its best rates or even 0.2% higher. Instead, you’ll start to look for a “subprime lender”. At a score below 600, more expensive mortgages at the range of as much as 2-5 times the rates available for best credits score are available (for instance, a 7% rate when the best rate is 3%). On top of a higher rate, you’ll usually face 2-4%+ processing fees split between the lender and the mortgage broker. Financial institutions that work almost exclusively with those who have a damaged credit score provide these mortgages. Sometimes, they are even offered by private mortgage lenders. At Sneg Mortgage Team, we have access to a wide range of lenders, including this type.
3. Be prepared to put a larger down payment than you wished for.
When you have good credit score of 700+, most lenders see you as low-risk. Therefore, depending on your income, they may allow you to put a minimal down payment of 5%. Once all you show is a bad credit score, the lender considers you as a higher-risk client, and to limit their risk level, they agree to lend less. In this case, you’ll have to come up with a much larger down payment, often 25%.
4. Show a steady and good income.
In order to get a mortgage you must be able to show that your income supports the monthly payments for that mortgage. Lenders tend to feel more secure with salaried employees over self-employed. However, there are ways to support a self-employed income in a way that maximizes the scores. Here at Sneg Mortgage Team we will calculate the proportion between your income and the projected mortgage payment, as well as the ratio between your income and your overall monthly commitments including credit card debt, car lease or loan, student loans, etc.. Lenders want to make sure that at least 55% of your income will be available for you after paying off all your monthly credit commitments. The bottom line is: a higher steady income works in your favor when credit is weak.
5. Choose a good property.
In the case of bad credit, the lender calculates their overall risk. When the property is considered as one that is in good condition, matches the market’s price, and has good potential to grow in value, the lender treats it as a protecting feature, supporting their decision to lend you the money. A property’s value is most important to the lender, and because of this, they will ask for an appraisal to confirm it. The importance of a property’s value becomes significant if for some reason you are unable to repeatedly make the mortgage payments. The lender will take possession and sell the property in order to recover their investment.
6. Bring a reliable co-signer on board.
When you wish to purchase or even refinance your mortgage, you may want to consider asking a friend or family member to co-sign on your application. Your co-signer should have a good credit score and no additional debts or mortgage payments. A co-signer gives the lender added protection, because they become responsible for the mortgage if you stop paying.
7. A good mortgage today paves your way to the best rates in the near future.
Your credit score impacts the selection of mortgage rates and lenders that are available for you. A good credit score will give you immediate access to all banks and the best mortgage rates, while a lower credit score implies that your risk level goes up. Consequently, this opens you to use other lenders that will charge fees and higher interest rates.
When we say “good mortgage for bad credit score” we do not necessarily refer to the best rates. We view the high-rate mortgage as one piece of a much bigger picture in building your family’s wealth. Keep in mind that having a bad credit score may be a temporary situation. It’s especially a good solution to enter the market, when property values go up washing out your down payment. In this situation, we’ll help you to get the mortgage that is available to you (with a higher rate, yes), but we’ll go for a limited term. Simultaneously, we’ll help you improve your credit score, so soon you’ll be ready to get the best rates and best deals in the market.
On your end, you are expected to responsibly carry out your commitments and pay all of them on time. You are also committing to following our plan to improve your credit score. This way you’ll be able to get back on track in a very short time. We have many success stories to share about clients who started with bad credit, higher rate mortgages, and today have access to the best deals. Some of them have already purchased an investment property on top of their current home.
Call us today and we’ll create a recovery plan that will take you where you want to be in the near future.