Bad credit can happen to anyone. A job loss, an illness or a few not-so-great decisions can have long term consequences for your credit score.
One of those consequences is that it can be hard to buy a house; banks use credit scores to determine how trustworthy borrowers are, and how likely they are to make their payments on time. Canada’s credit bureaus (Equifax and TransUnion) assign you a number between 300-900, and if your score is below 600, you may have a rough time trying to borrow from Canada’s major banks.
But, there is hope.
Option 1: Wait it Out
Your best bet, although it may be a tough pill to swallow, is to delay purchasing a home.
Your credit history will renew itself with time and better credit decisions, and you may want to wait until you’re in a better position to take out a mortgage. (An additional bonus is that you can use this time to save a bigger down payment.)
This option is best for Canadians who are looking at properties in smaller cities, like Ottawa real estate or Edmonton real estate, where the market is rising at a relatively reasonable pace. If, however, you live in a city where values are rising fast, for example, prices for houses for sale in Toronto or Vancouver, you may want to jump in the market before you’re priced out.
Option 2: Try Alternative Lenders
One way to do this is to go to a subprime lender or trust company. These institutions will lend to Canadians with a score as low as 550. The caveat? Your interest rate will be way higher. Since interest rates are at near-historic lows, however, even a few percentage points higher is still fairly low. A private lender is also an option, although the interest rates they charge can be onerous. Tread carefully here — don’t let your desperation for a house lead you into a monthly payment that you can’t afford comfortably.
Option 3: Make Saving Your Biggest Priority
But whatever you decide to do, focus on saving up as big a down payment as possible. Everyone should ideally be saving 20 percent, but some lenders require Canadians with bad credit or bankruptcy to save at least 25 percent. Either way, it’s good practice to save, save, save — when it comes to a down payment, bigger is better. That’s because the less you borrow, the easier it is for you to qualify. Since you’re also likely to be paying a higher interest rate than Canadians with better credit, you want your monthly payments to be as small as possible to allow for that extra charge.
Above all else, don’t stress or get down on yourself. Your credit score can and will be repaired, and going through the process of figuring out how to purchase a house will be a good way to continue to develop responsible financial management skills.
Zoocasa.com is a leading real estate company that combines online search tools and a full-service brokerage to empower Canadians to buy or sell their homes faster, easier and more successfully. Home buyers can browse real estate listings on the website or the free iOS app.
