Your credit is a tool you can use to access a variety of financial benefits. In fact, having a high credit rating and a credit record can help you get some of the best interest rates on a lot of credit products, such as credit cards, auto loans, and of course, mortgages. However, what happens to your financial outlook when you have a low credit rating?
Nowadays, many people are doing very well without owning or renting a car. Some may even operate without any credit card in their wallet. However, despite the fact that many Canadians are content to only rent an apartment, there are a lot of us who are looking to achieve a certain goal: own a home to raise a family. On the other hand, for people who have bad credit, the chances may seem slim. In fact, bad credit mortgages are commonly referred to as “high risk” mortgages, because of the level of financial risk that both the borrower and the lender take. So let’s talk about the mortgage process for borrowers with bad credit, and how their low credit rating does not necessarily mean the end of their dreams.
Factors examined by lenders
There are some basic factors that almost all lenders consider when considering potential borrowers for mortgages, whether they are a lender A such as a bank, a lender B as a trust company, or a private lender. Although each lender has a different approval process for their mortgages, here are the most important points in a borrower’s financial history that will generally be examined:
- Credit Rating: One of the most important aspects of determining mortgage rates for potential borrowers is, of course, credit score, this three-digit number that encompasses a user’s financial habits. The higher a borrower’s credit rating, the more likely they are to get a favorable mortgage rate from a traditional lender. Most major banks and other major lenders will require a credit score of 650 or higher before considering someone as a potential lender. Check your credit rating if you are thinking about applying for a mortgage.
- Credit/history record: Keep in mind that your credit rating and credit report are two separate entities and both will be scrutinized by major lenders. Not only will lenders be able to see who you may owe money for but they will also have a detailed account of how you have used your credit in the past (one-time payments, missed / late payments, default payments etc.) This will give them an idea of your reliability for your mortgage in the future.
- History of Income and Jobs: Lenders want to be assured of the borrower’s ability to repay, which means that a household’s income can often be just as important as the credit rating. Thus, when you apply, your work history and financial records will be reviewed to determine the probability of default. No matter how much money you have in your bank account right now, a jagged job history could make a lender doubtful about your ability to maintain a job. The same goes for your income. If your income is confirmed by the Canada Revenue Agency, your chances of getting a better rate are greater. For unconfirmed earnings, which are common among self-employed and commissioned workers, lenders will have to calculate the average annual income before making a decision.
- Down payment: The more a borrower can give a high down payment, the more chances he will have to get his mortgage. In general, borrowers with good credit are considered low risk, so that down payment up to 5% of the value of a home is accepted. However, borrowers with low credit will likely need to make a down payment of at least 20%. On the other hand, if a borrower succeeds in making a larger down payment, not only will he have more capital and a shorter payment period, but he will probably also have access to better mortgage rates.
- Debt History: Since a mortgage is one of the most expensive things a borrower can have, potential lenders will surely look at the debts of the user. This means that unpaid credit card bills, auto loan payments, or other high-interest debt will affect a borrower’s chances of getting a mortgage. After all, they will probably not want to lend to those who owe money to the whole city and who are unlikely to pay their royalties. So, if you have a lot of high-interest debt to manage, it is best that you deal with it before you start applying for mortgages.
- Property Value: This factor is especially important for potential bad credit borrowers working with at-risk or private lenders. After the borrower in question finds a home, he must have it evaluated and ranked according to its value as good. If the lender doubts a bad credit borrower, he will have to be assured that the property is worth the investment he will make, in a case where the borrower is in default.
Ways to buy a house when you have bad credit
For the purposes of this article, we will assume that anyone who reads it has a less than favorable credit, but would still like to work on the purchase of the house of their dreams. Although it will not be as easy or cheap for you as for someone with excellent credit, do not be afraid. It is still possible to get a mortgage, even if you have made a consumer proposal or bankruptcy at one time or another. Here are some steps you can take to get a high-risk mortgage.
- Be patient. Taking the time to rebuild your credit will always work in your favor if you are looking for a mortgage. Patience is especially important for those who have had a consumer proposal or who have gone bankrupt. Most conventional lenders (banks and other traditional financial institutions, etc.) will probably not even approve of you for a minimum of 2 years after the end of your case. So, it’s best to take the time to improve your finances and get back to a higher credit rating and keep it.
- Find a stable job. If you have good credit and a decent income, even if you are self-employed or an employee on commission, conventional lenders will certainly approve you for a mortgage. However, if you have bad credit, a consumer proposal or a bankruptcy, an unstable job history will only add to the opinion of a lender that you are a risky investment. For this reason, it is best to find a reliable source of income, especially if you hope to work with a conventional lender one day.
- Return to the risky or private lenders. If you can not wait until your credit is rebuilt, you can consider going to a lender who deals with bad credit borrowers. If your credit rating is less than 600, you may have no choice but to find a private lender. And if your credit rating is slightly higher but not excellent, you can qualify with a trust company or other bad credit loan institution. On the other hand, with private lenders, instead of being forced to put a 5% down payment on your home, with a mortgage rate of 3-4%, you will probably have to put 20% or more, and your rate will be 10-15% or maybe even more.
- Save for a larger down payment. Because of your reduced chances of getting a mortgage from a conventional lender, it is best that you take the time to save your money for a larger down payment. Not only will this help you qualify for a risky lender if you need it, but it is also a sign that you are improving your finances, proving to lenders that you are less of a financial risk to the conventional lenders with whom you could apply in the future. A large down payment also means that the repayment period for your mortgage will be shorter, or you may choose to make smaller payments, by amortizing your high-risk mortgage over a longer period.
- Improve your credit rating. Take the time and make the effort to rebuild your damaged credit rating. You can do this by being responsible for credit products and the financial commitments you always have. This means that you pay all your bills on time and in full, no matter what they relate to. If you can not afford to pay your credit card statement, make sure you meet minimum monthly payments. If you do not qualify for an unsecured credit card, try using a secured credit card until you are freer. However, it is important not to make too much demand for new credit in the same period. Larger claims will lower your credit rating and this can demonstrate that you still have debt problems. Resolve your debt problems at debt consolidation care review.
Save more, spend less
This idea goes hand in hand with savings for a down payment. Saving money and reducing unnecessary expenses are two of the most important things you can do when you want to become a homeowner, whether you have good or bad credit. Especially if you have bad credit. You will face higher mortgage rates, in addition to the many other costs associated with the property.
However, despite bad credit, even if you have already made a consumer proposal or bankruptcy, you can still get a high-risk mortgage. This can take a little time, money and effort, but rest assured, the house of your dreams is not out of your reach.