Getting a Mortgage with Bad Credit
September 13, 2023
You may have heard that having a bad credit score makes it impossible for you to get a mortgage. That's especially alarming when you realize how easy it is for late payments, past bankruptcies, and other financial problems to take a major toll on your credit score. Fortunately, there are ways for you to get a mortgage with a negative credit history. Check out this guide to getting a mortgage with bad credit.
1. Find Out Your Credit Situation
As a consumer, you have the right to obtain your credit report from either or both of the two major credit bureaus in Canada, TransUnion and Equifax. Many people don't know that they're entitled to a free credit report from both of those entities. These credit reports go far beyond the numerical score that you may have gotten from a mortgage lender. Instead, they contain a detailed report of exactly why your credit score is as low as it is.
Sit down with each of your credit reports and examine them thoroughly, marking any of the items on your report that are contributing to your score. If you find something on there that doesn't belong, contact a credit reporting agency to dispute them.
2. Start Improving Your Credit
Even if your credit score is low, you're not stuck. Start making sound financial decisions that will positively impact your credit. Begin by making a budget that you're fully committed to sticking to. One of the easiest ways for consumers to damage their credit is by spending money they don't have on things they don't really need. Having a written budget in place allows you to follow a road map to financial success.
Paying your bills on time and taking steps to reduce your current debts will improve your credit. Additionally, don't fall into the trap of thinking that you have to stop using credit cards to improve your score. Using a credit card to pay for things within your budget and then promptly paying those bills is a great way to improve your credit.
3. Exploring Mortgage Options for Bad Credit
Some banks are simply unwilling to work with people who have bad credit. Most banks have minimum credit scores in place, and any number below that makes an applicant unqualified. Different types of mortgages have different minimum credit scores, but many Canadians with scores below 680 have a hard time finding someone to lend them money. To further complicate matters, even if you find a bank to lend you money with bad credit, you'll likely pay exorbitant interest fees and a high down payment.
If you have someone willing to co-sign for your loan, that can certainly help. However, it's often hard to find someone willing to put their name on a mortgage in order to help you buy a home. With that in mind, consider looking into private mortgage lenders. Several private mortgage lenders specialize in working with applicants who have sub-par credit. These lenders have policies in place that make it possible for people to get access to the funds they need to make their dreams of homeownership a reality.
4. Saving for a Larger Down Payment
When lenders see someone with bad credit, they see a high-risk investment. Loaning you money to purchase a home is an investment that the lender is making in you. Since lenders want to protect themselves against the risk of a borrower defaulting on a loan, one of the best ways to make yourself look better is to come in with a sizeable down payment. By living on a tight budget as we discussed earlier, you can quickly increase the amount of money you have in savings.
It's also a good idea to look into down payment assistance programs. Many Canadian down payment assistance programs are only offered to first-time homebuyers, so it can be a bit more difficult if you've been through this process before. Spend some time researching your options and apply for any type of help that you believe you're eligible to receive.
5. Seeking Professional Assistance
Mortgage lenders aren't only there to sign off on mortgage applications. Part of their rigorous training and licensure program involves learning how to help people improve their credit. Don't be afraid to ask a lender to help guide you through your options when you're looking for a way to improve your credit score. You can also reach out to a credit counseling service.
Finally, there are also mortgage advisors and financial planners who specialize in helping people with bad credit get on the path to homeownership. Working with these professionals gives you a better idea of what you need to do to improve your credit with homeownership as the ultimate goal.
6. Building a Strong Mortgage Application
Applying for a mortgage isn't all that different than applying for a job. Instead of asking someone to hire you, you're asking them for a significant amount of money. One of the first things that mortgage lenders require with an application is a look into your current financial situation. Gather your tax documents, pay stubs, and other pieces of information that illustrate how much money you make, how consistently you make it, and why you're in a good position to pay them back.
If you have a bad credit score, you should also include a detailed letter that explains why you had financial issues in the past and how you've overcome them. Make sure that this letter emphasizes the positives of your financial situation, such as stable employment, consistent income, and ample savings.
7. Negotiating Mortgage Terms
Many mortgage applicants don't know that they can shop around when looking for a home loan. While some types of mortgages have requirements in place that are set by the government agencies that insure them, many institutions have their mortgage products, each of which comes with different rates and down payment requirements. Spend some time gathering information about the products offered by each lender. Additionally, many lenders are willing to offer adjustable-rate mortgages (ARMs) or shorter-term loans. ARMs are often considered more secure for lenders because interest rates can fluctuate based on market conditions.
Also, remember that you have the right to try to negotiate better loan terms. While you're probably not going to convince a lender to change their interest rates by multiple percentage points, you do have the power to negotiate.
Bad credit doesn't have to preclude you from buying a home. Changing your financial strategy, putting yourself on a strict budget, and considering all of your options, such as ARMs and private mortgage lenders can help you tremendously in your pursuit of owning a home.
CVE is a mortgage broker that specializes in working with applicants who have some blemishes on their credit history. We have the resources and the knowledge to help you overcome the past financial misfortune that is holding you back. Contact us today to find out more about how we can help you get a mortgage that you can afford and own a home of your own.