After a few financial fumbles, you're back on track. Your capital is steady, and you're ready for your first real investment: buying your own home.
The caveat? You're not sure if past issues with your credit history will prevent you from securing a mortgage loan from a lender.
While that may be true in preventing you from getting the best mortgage interest rates possible, that doesn't mean you can't get a mortgage for the property you covet. A bad credit mortgage and other options are available, which we'll detail here. But be warned: it won't come cheap, and that's saying something with the exponentially rising prices in owning a home today.
Take Note of Your Credit Score
Before you consider any bad credit mortgage options, you should confirm that your credit score is too low. If you don't keep regular tabs, maybe you'll fall under a favourable bracket for better mortgage rates.
In Canada, credit scores range from 300 to 900 designated by a credit bureau. It's a barometer for lenders to gauge how well you've managed credit in the past. With no major bankruptcies, no significant debts, and you're punctual paying bills, you could easily have a credit score above 680. If you're above that - you should be able to secure quality mortgage interest rates.
Anything below that, you'll need to consider seeking out a bad credit mortgage lender.
Bad Credit Mortgage Lenders
With a credit rating under 600, a mortgage from a big bank - or 'A lender' - isn't feasible. Instead, you'll need to opt for a B lender, or subprime lender, who almost exclusively deals with people sporting a suboptimal credit history. If you've decided to work with a mortgage broker, they should be able to recommend you a lender that they're confident will give you mortgage approval.
Before a bad credit lender can approve your mortgage loan, they'll assess multiple variables to ensure there's no financial risk for them. These are common criteria to be aware of.
Higher Minimum Down Payment
The difference between a mortgage with good credit vs. one with poor credit is substantial. Backed by a strong credit history, a mortgage loan might only require a 5% down payment, as that person is a low risk investment.
With a paltry credit rating, that number jumps to a MUCH larger down payment – in the range of 20-25%! So before you even consider acquiring your own property, make sure you can afford the lofty down payment first.
The upside here is paying that heftier down payment will give you a bit more leverage towards mortgage approval. Committing that much equity into the home will make you seem like a less risky investment.
This is common sense, and applies to any mortgage loan really. You'll need to be able to prove you have consistent, sufficient income to repay the money and that you're capable of handling a home mortgage.
Lenders evaluate this by calculating a person's gross debt service ratio (GDSR). GDSR is a percentage of your gross monthly income that can be put towards housing costs - things like utilities, property taxes, and the mortgage itself.
A Reliable Co-Signer
Sometimes even a major down payment and solid income isn't enough for bad credit mortgage lenders to give you mortgage approval. Especially true in bad credit mortgage refinancing, lenders will often want a co-signer to guarantee the bad credit home loan. Having a family member or friend co-sign the application offers a safety net for lenders on the fence about handing you a home mortgage. A co-signer can step up and take responsibility for the mortgage if you're unable to make payments for whatever reason.
Not only will you need to set aside extra funds for a fat down payment, but for additional fees as well. Lenders can charge 1% of the mortgage loan value for simply processing a bad credit application. Your broker (again, if you have one) can tack on another 1%, as banks or lenders don't reimburse them for delivering bad credit clients.
A simple 2% on, say, a $400,000 home is already an additional $8,000! Add on a 20% down payment right off the bat, and you'll need $88,000 available before you make the purchase.
Like we said, a bad credit mortgage, while doable, won't come cheap!
Magical Credit can assist with meeting your mortgage payments with our personal loan services. Proof of steady income, even from non-traditional sources, may make you eligible for a $2,000-$10,000 small loan.
Fill out an application now to see if you qualify!