Many Canadians face credit issues when life’s hurdles get in the way; whether it is a job loss, an illness, or a lack of credit. It can take a while to get back on the right track, which can mean having to delay buying a home. Waiting may not work for everyone, and there are people who — other than damaged credit — have all their ducks in a row and are ready to take the home ownership plunge. Fortunately, there are some options available to help those people; the bad news is these options do not always come cheap. Here are some ways you can monitor your credit score and get a bad credit mortgage.
Save a bigger down payment
There are a few factors lenders examine when determining whether to accept your mortgage request or not. Besides your credit score, lenders will assess your income, level of debt, and how much in savings you have. Borrowers with good credit can get approval for a mortgage with as little as a 5% down because they are seen as low risk. People with bad credit are regarded as high-risk borrowers and, as such, are expected to put at least 20 to 25% down. A large down payment also gives you an advantage when negotiating a mortgage rate because it reduces your degree of risk as a borrower. Putting in more equity proves you are invested in the property, and it also means your mortgage will be less overall.
Check your credit score
If your score is below 680, you will likely be unable to obtain the best loan rates and should prepare to make arrangements respectively. You can check your credit score for free through Mogo Mortgage or Borrowell any time online after answering a few simple questions. In Canada, your score can be between 300 to 900, with a higher score being best. Your score is assigned to you by Equifax and TransUnion – Canada’s two major credit agencies. A credit score basically tells lenders how you dealt with credit previously. The score gives new lenders an idea of how trustworthy you will be with additional credit. Even if your poor score is the result of one setback, it can still take years of good borrowing habits before your score climbs back up. Once your score takes a hit, be adamant about paying bills on time and paying down your debt to bring it up again.
Find a bad credit lender
Big banks are known as “A lenders” and are most commonly used by people with a credit score above 600. If your score is below 600, big banks will likely not grant you a home loan. Instead, you will have to turn to a subprime lender or “B lender.” These institutions work almost exclusively with people that have lower credit scores. If you declared bankruptcy or have made a consumer proposal in the past two years, you might need to seek a private mortgage lender. A mortgage broker can connect you with a lender who is best suited to your circumstances.
Prepare for more fees
On top of a larger down payment, you will also be paying more in fees. Lenders can charge as much as 1% of the value of the mortgage for processing a bad credit home loan application. Also, banks do not pay financiers who bring clients with bad credit, so your broker may also charge an additional 1%. Just a 2% addition in service charges alone can amount to thousands of dollars being spent.
Mortgage options for those with impaired credit are not always the most fiscally responsible. Having problems with credit can be a sign of a broader issue with money management. If this sounds like you, consider delaying your home investment to allow your credit score to improve and develop better spending habits.