How to Get a Mortgage with Bad Credit
Becoming a homeowner is a dream of many Canadians. But for those without good credit, this dream may seem like it is out of reach. 2020 in particular, has posed a number of challenges for many would-be homebuyers. With a global pandemic, and economic uncertainty – some Canadians have decided to put their dream on hold. For others however, waiting maybe not the best option for them as they may be ready to purchase a home but the only thing that is holding them back is back their credit.
However, it is still possible to get a mortgage even with bad credit, and in this article, we are going to discuss what you need to know.
What is a Bad Credit Mortgage?
Just like the name suggests, a bad credit mortgage is a mortgage designed for homeowners with a less than stellar credit rating. When you apply for a mortgage in Canada, one of the first things that a potential lender will do is check your credit score with the two major credit bureaus: Equifax and TransUnion.
The better your credit score rating is, the easier it will be to get a mortgage – and the better interest rate you will be able to obtain. Canadians have credit scores that range from 300 to 900. Any score below 600 is considered a bad credit score.
What your credit score means:
- Over 680 – Good
- 600 to 679 – Fair
- Less than 600 – Poor
It is important to understand that if you have bad credit, you most likely will not be able to qualify for a mortgage through a traditional lender like a bank or credit union on your own. Fortunately, there are alternative and private lenders who specialize in helping Canadians with poor credit score ratings to obtain mortgages. Keep in mind that if you opt for a bad credit mortgage, it will be at a higher interest rate than a conventional mortgage lender offers. This may be worth it however if it helps to get you into a home of your own. Furthermore, if you work on improving your credit, you may be able to get a better interest rate at the end of your mortgage term. Working with a professional mortgage broker such as the ones at Mortgages in GTA will help to ensure that you find a lender who is reputable and that can provide the right mortgage for you.
Checking your credit score
If you wish to know what your credit score is, you can get detailed reports from Equifax and TransUnion usually for a small fee. Knowing your credit score will give you a better idea of whether you might qualify for a traditional mortgage or if you will need to apply for a bad credit mortgage.
Keep in mind however, that each lender uses a different calculation so their credit score for you may be slightly different than the one you see on your credit report.
How can I get a mortgage with bad credit?
If you discover that you have bad credit, and you still wish to get a mortgage, here are 5 tips that can help you.
Improve your credit score.
If your credit score is borderline between qualifying for a bad credit mortgage and a traditional one, it may make sense to focus on improving your credit score so that you will be able to qualify for a better interest rate. Steps that you can take to improve your credit score include:
- Making sure that your bills are paid on time.
- Staying under your credit limit (in fact, you should try to use no more than 30% of your available credit limit).
- Avoid applying for too much new credit. Keep in mind that every time you apply for more credit it temporarily lowers your credit score.
- Keep your oldest account. When it comes to your credit accounts, the amount of time you have had them matters. So, make sure you always keep your oldest account to keep your credit score healthy.
Save a larger down payment.
Although important, your credit rating is not the only thing that lenders take into consideration when deciding whether or not to give you a loan. The size of your down payment can also make a big difference. In Canada, the minimum down payment is 5% – but if you don’t have the best credit rating, then you will need to consider saving more than that. Typically saving 20-25% can help you get a mortgage with a bad credit rating. It will also lower your monthly mortgage bills.
Find a bad credit mortgage lender.
If your credit score is below 600 and you don’t see yourself waiting until you have improved it to get a mortgage, you can always apply for a bad credit mortgage. There are a number of alternative and private lenders in Canada who specialize in this type of mortgage.
To ensure that you find a lender who is reputable however, it is best to work with a mortgage broker. Mortgage brokers know the industry and they know which lenders are best to work with and which ones to avoid, so you can make the right decision regarding your finances.
Consider getting a co-signer or a joint mortgage.
If your credit isn’t good enough to get the interest rate you want on a mortgage, having a co-signer may help you to get a better rate. A co-signer acts as a guarantor on your mortgage.
Keep in mind however, that getting a co-signer comes with risks. Your co-signer will be taking a big financial risk on you since they are promising to make your mortgage payments for you if you are unable. You are taking a risk as well since many lenders will insist that your co-signer’s name get put on the title of your home.
Getting a joint mortgage is another option to help you get a better interest rate. This is when two people live in a single home and own it together.
Work toward your next renewal.
Just because you don’t have a favourable interest rate right now, it doesn’t mean that you can’t get one when it comes time to renew your mortgage. Most mortgage terms are up to five years which is plenty of time to improve your credit score rating using the tips outlined above. If you can improve your credit score enough, you may even be able to move from a private or alternative lender to a traditional lender such as a bank.
Regardless of how much you improve your financial situation, you should always shop around when it comes time to renew your mortgage. Most people make the mistake of just accepting the new offer from their current lender. And in doing so, they often miss out on thousands of dollars in interest savings. A few months before your renewal date, it is good practice to consult with your mortgage broker to see if they can get you a better rate – they usually can!
Will getting a mortgage loan improve my credit score?
Getting a mortgage loan can in fact help you improve your credit score – eventually. Like all large loans, getting a mortgage will lower your credit score initially. But as you pay it off, it will help to build your credit score and your credit history.
The caveat here is that you must make your payments in full and on time. If you are late with your payments, that will harm your credit score.
Does applying for multiple mortgages affect credit?
While it is important to compare the rates of different lenders, the last thing you want is to have multiple lenders checking your credit score at the same time. Each time a check is run, your credit rating is temporarily lowered.
A far better option is to work with a professional mortgage broker like Mortgage in GTA. Your mortgage broker only needs to run a credit check once in order to get multiple quotes on a mortgage for you. Working with a mortgage broker is the best way to shop for the best rate on a mortgage while still protecting your credit.
Mistakes to avoid when applying for a bad credit mortgage.
When applying for a bad credit mortgage, there are a few pitfalls that you need to avoid. The following are some of the top mistakes that people often make and how to avoid them.
Not working with a mortgage broker – unfortunately when it comes to bad credit mortgages, there are some unscrupulous lenders out there. The best way to avoid them is to work with a mortgage broker who knows the industry.
Not being honest about your credit history – While it can be tempting to misstate information on your mortgage application, don’t do it. This is fraud and will only end up getting you into trouble down the road.
Not having a budget – Owning a home is more than making mortgage payments. There are also utilities, repairs, city taxes, etc. To really know if you can afford to own a home, you need to take all these expenses into account and make a budget.
Not planning for one-time fees – When you purchase a home, there are several one-time fees that many people forget to budget for. These include legal fees, inspection fees, closings costs, etc.
Not working toward your renewal date – just because you have a bad credit mortgage now, it doesn’t mean that you always have to have one. You can use the time to improve your credit so that when your mortgage comes up for renewal, you can qualify for a better mortgage at a better mortgage rate. When you start to get close to your renewal date, book an appointment with your mortgage broker to discuss getting a more favourable mortgage at renewal time.
Points to remember when applying for a bad credit mortgage.
Applying for a bad credit mortgage need not be complicated if you remember the following tips:
Check your credit – knowing your credit score will give you an idea of the kind of mortgage you can qualify for.
Work with a mortgage broker – working with a professional mortgage broker is the best way to find a reputable lender for a bad credit mortgage.
Budget for fees – subprime lenders may have additional fees that you will need to pay. If you are purchasing a home, there will also be other fees such as legal fees and closing costs. Don’t forget to budget for these.
Gather the appropriate documentation – each lender may have different requirements when it comes to documentation but in general, this can include things like bank statements, pay stubs, T4s, etc. Your mortgage broker will provide you with a list of what documentation is required.
Ensure forms are filled out completely – go through each form and ensure that it is filled out completely. If there is missing information, it will only slow down the mortgage approval process.
Ask questions. Applying for a mortgage can sometimes be a confusing process. If you have questions, don’t be afraid to ask them. That is what your mortgage broker is there for!
I’ve been approved for my bad credit mortgage. Now what?
So, you’ve been approved for a bad credit mortgage – congratulations. Here are a few things that you should still keep in mind:
Don’t apply for new credit before you close on your home. Every mortgage – even a bad credit mortgage is based on your credit rating at the time of your application. If you make a major purchase on credit before you close on your home, it could jeopardize your mortgage contract with your lender.
Work on improving your credit before your renewal date. The better your credit is at the time of your renewal date, the more likely it is that you will be able to get a traditional mortgage and a much better interest rate when it is time to renew your mortgage.
Consider refinancing. If you improve your credit before your mortgage renewal date, you may want to consider refinancing. Refinancing can give you a much better interest rate but there will also be a financial penalty for breaking your mortgage early. Your mortgage broker will be able to help you figure out whether it will be worth it for you to refinance.
Do you have more questions about how you can get a mortgage with bad credit? Are you ready to take the plunge and become a homeowner even though your credit isn’t perfect? If so, we can help. Contact Rumy Gill today