Have all eggs in the basket and ready to take the homeownership plunge?
Suffered financial issues due to pandemic?
But wait, can you get a mortgage with bad credit?
Fortuitously, you can still get a mortgage even if your credit is less than stellar!
Yes, you read it right, borrowers with bad or low credit can get mortgage financing through various programmes customised for their needs and situations. Some of these programs are – bad credit mortgages, adverse credit mortgages, or sub-prime mortgages.
A credit score tells the lenders about the borrower’s repayment capacity and ability as a high score implies more reliability and a low score suggests bad credit and less reliability and confidence. A bad credit score mostly falls below 630. It attracts high-interest rate etc
The good news is credit scores are not persistent or everlasting, so with a few financial changes and adjustments, one can easily strengthen their credit score and move up in the credit range, which would mean reduced borrowing costs when you close your loans. Also, there’s such a thing as bad credit home loans, your credit might not be as much of a roadblock as you think.
No need to panic with bad credit, in this post we will talk about a few tips that can help you get a mortgage with low or bad credit along with things you should consider and follow;
1. Improve your credit score
A higher credit score is advantageous as it helps you secure a lower mortgage rate, thereby lower monthly mortgage payments.
Tips for improving low credit score:
Make payments on time
It is advisable to pay all the bills of utilities, cell phone and debt payments within the stipulated time and avoid missing any payments. Try and make partial payments or go for payments plan if you can’t pay the full amount as missing the payments can lead to delinquency thereby harming the credit score.
Maintain the credit limit
Don’t use more than 30% of the credit limit, as this shows a sense of responsibility on your part as overspending hampers the credit score.
Avoid too many credit cards
Having or applying too many credit cards can be alarming for credit-report agencies that you need continuous fast cash
Maintain old account and don’t get them closed
It is essential to maintain your old credit card and accounts. As the length of credit history has positive effects on the score so try and maximise the length of credit history.
These tips are highly important to keep your finances in line and enhance your credit score.
2. Save a larger down payment
Apart from credit score, other important determinants of mortgage application like income level, debt level and size of down payment, usually in Canada a minimum of 5% down payment is required but with bad credit, it is suggested to save 20-25% of the down-payment for a bad credit mortgage. This will convey to the lender that you are financially stable and trustworthy for the mortgage. This will further reduce the monthly mortgage payments too and liberate you from mortgage default insurance, (which is essential for lenders protection and is required in case of less than 20% mortgage down payment).
3. Find a bad credit mortgage lender
A credit score below 600 is considered as a bad credit score in Canada and would require you to look for a B lender or subprime lenders.
These include trust companies, which work with almost all the people with low credit scores. Whereas in case of a bankruptcy or consumer proposal within the last two years, private mortgage lenders will work for you. So, depending on your situation different mortgage lenders will be suitable for you.
4. Consider a co-signer or joint mortgage
Co-signer or joint mortgage or Co-borrower is another vital option with a bad credit score. It brings a third party as a guarantor of the mortgage who promises or guarantees to pay monthly mortgage payments in case the borrower defaults. Co-signers need to show and validate their incomes and credit score too, since this is a risky process, mostly co-signers are parents or relatives in most cases.
Another option is a joint mortgage is another option you could consider. In this they generally see two or more people own and live together in a single home, though not always.
5. Work towards your next renewal
Any bad credit mortgage can be compensated at the end of the term. Most terms are 5 years, which is an ample amount of time to improve your financial situation.
It is ideal to improve the credit score between the start of your mortgage contract and renewal date. By using the tips outlined above, you could improve your credit score, resulting in a lower interest rate and thereby saving you thousands of dollars in interest. Make sure to always go for a better mortgage rate when you renew.
Buying a house is a big investment and one of the crucial purchases that we make in our lifetime. However, with the increasing prices of property, it becomes challenging to afford a house with an annual income or savings. So, it becomes a necessity to avail a mortgage. It’s not hard to get a couple of blemishes on your credit report. It’s easy to see your credit dip or less than optimal credit if you’re not careful. Hope these tips help you get a mortgage with a bad credit. Stuck with the thought in your head? Call our Mortgage agent for expert advice, just because your credit score is suboptimal doesn’t mean you have to give up on your dream of homeownership.