Buying a House in Canada With Bad Credit
Your credit is a tool that you can use to gain access to a variety of financial benefits. In fact, having a high credit score and report can get you some of the best interest rates on a lot of credit products, such as credit cards, car loans, and of course mortgages. Then again, what happens to your financial prospects when you have a low credit score?
Many people in this day and age get by just fine without owning or leasing a car. Some can even get along with no credit cards in their wallet. However, while lots of Canadians are content to rent apartments, there’s certainly a large population of us out there that are striving towards one goal. Owning a house to raise their family in. However, for those with bad credit, their prospects can seem grim. In fact, bad credit mortgages are also known as “high-risk” mortgages, because of the level of financial risk that the both the borrower and lender are taking. So, let’s discuss the mortgage process for borrowers with bad credit, and how their low credit score might not necessarily be the end of their dreams.
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Factors that Lenders Looks At
There are a few basic factors that almost every lender looks at when considering potential borrowers for mortgages, whether they’re an A-lender like a bank, a B-lender like a trust company, or a private lender. While every lender will have a different approval process for their mortgage loans, these are some of the more notable points in a potential borrower’s financial history that will likely be examined:
- Credit Score – One of the most important parts of how mortgage rates are determined for potential borrowers is, of course, their credit score, the three-digit number that encompasses a credit user’s habits. The higher a borrower’s credit score, the better their chances are of securing a better mortgage rate with a prime lender. Most major banks and other prime lenders will require a credit score of 650 or higher before they consider someone as a potential borrower. If you’re thinking about applying for a mortgage loan, it’s a good idea to check your credit score first.
Canadian credit score ranges, click here.
- Credit Report/History – Remember, your credit score and credit report are two separate entities and both will be under the microscope, especially by prime lenders. Not only will lenders be able to see who else you might owe money to, but they’ll have a detailed record of how you’ve been using your credit products in the past (timely payments, missed/late payments, defaults, etc.). This will give them an idea of how trustworthy you’ll be with your mortgage in the future.
- Income and Employment History – Lenders want to be assured of a borrower’s ability to pay them back, this means their household income can often be just as important as their credit score. So, when you apply, your employment history and financial records will be examined to determine the likelihood of you defaulting. No matter how much money you have in your bank account currently, a rocky employment history might make a lender question your ability to hold down a job. The same idea goes for your income. If your income is “confirmable” through the Canada Revenue Agency’s notices of assessment, your chances of securing a better rate will improve. For “non-confirmable” incomes, frequently seen with self-employed and commission-based workers, lenders will need to calculate their average yearly income before making their decision.
- Down Payment – The higher down payment that a potential borrower is able to make on a property, the better. Typically, borrowers with good credit are considered lower risk, so down payments as low as 5% of a home’s value are accepted. However, borrowers with poor credit will likely require a down payment of at least 20%. On the bright side, if a borrower does manage to make a larger down payment, not only will they have more home equity and a shorter payment period, but they will likely also have access to better mortgage rates.
- Debt History – Since a mortgage is going to be one of the most expensive things a borrower can undertake, potential lenders are surely going to examine their other debts. This means unpaid credit card bills, car loan payments, or any other high-interest debt will affect the borrower’s chances of getting a mortgage. After all, they probably won’t want to lend to anyone who owes money all over town and has little chance of paying their dues. So, if you’ve got a lot of other high-interest debt to take care of, it’s best that you see to it before you start applying for mortgages.
- The Value of the Property – This factor is especially important for potential borrowers with bad credit who are working with subprime or private lenders. After the borrower in question finds a house, they must have it appraised and ranked in accordance with how valuable an asset it is. If the lender is skeptical of a borrower with bad credit, they’ll need to be assured that the property is worth the investment they’ll be making, if and when said borrower should default on their payments.
Wanted to know what it costs to purchase a house in your city? Check out this infographic.
Ways to Buy a House With Bad Credit
For the purposes of this article, we’ll go ahead and assume that anyone reading it has less-than-favorable credit, but would still like to work towards buying their dream home. While it’s probably not going to be as easy or cheap for you as it will be for someone with good credit, fear not, it is still possible to get a mortgage, even if you’ve gone through a consumer proposal or bankruptcy (ADD NEW BANKRUPTCY ARTICLE?) at some point in your life. Here are a few steps you can take toward securing a high-risk mortgage. (Note that if you read the list below, just be aware that some of those factors are going to vary in accordances with just how bad your credit might be)
- Be Patient – Although taking the time to rebuild your credit will always work in your favor when you’re searching for a mortgage, being patient is especially important for those who have had a consumer proposal or gone bankrupt. Most conventional lenders (banks and other traditional financial institutions, mainstream mortgage brokers, etc.) are probably not going to even consider approving you for a minimum of two years after your case was discharged. So, it’s best to take that time to improve your finances and get your credit score back up.
- Find Stable Employment – If you’ve got good credit and a suitable income, even if you’re self-employed or a commission worker, prime lenders will still approve you for a mortgage. However, if you have bad credit, gone through a consumer proposal or bankruptcy, an unstable employment history will only add to a lender’s opinion that you’re a risky investment. For that reason, it’s best to find a stable source of confirmable income, especially if you one day hope to work with a prime lender.
- Look Into Subprime and Private Lenders – If you cannot wait until your credit is rebuilt, you can consider going with a lender that deals with bad credit borrowers. If your score is lower than 600, you might have no choice but to find a private lender. And if your credit score is between slightly higher but still not excellent, you may qualify with a trust company or other bad credit lending institution. A reminder, with private lenders – instead of being able to put a 5% down payment on your home, with a mortgage rate of 3-4%, you’ll likely have to put a down payment of 20% or more, and your rate will be 10-15%, or possibly even more.
- Save For a Larger Down Payment – Because of your decreased chances of securing a mortgage with an A-lender, it’s best that you take the time to save your money for a larger down payment. Not only will this help you qualify with a subprime lender if you need to, but it’s also a sign that you’re improving your finances, showing that you’re less of a financial risk for any prime lenders you apply with in the future. A larger down payment also means your mortgage payment period will be shorter, or you could choose to make smaller payments, amortizing your high-risk mortgage over a longer period of time.
- Improve Your Credit Score – Another area where patience is certainly a virtue. Take the time and make the effort to rebuild your damaged credit score. You can do so by being responsible with any credit products and financial commitments you still have. This means paying all your bills on time, and in full, regardless of what they pertain to. If you can’t afford to pay your full credit card statement, be sure to at least meet the minimum monthly payments. If you don’t qualify for an unsecured credit card, try using a secured credit card until you do. However, it’s important not to apply for too much new credit all at once, as hard inquiries cause your credit score to drop and doing so might show you’re still having debt problems.
For more information about Canadian interest rates, read this.
Save More, Spend Less
True, this idea goes hand-in-hand with saving for a down payment. Saving your money and cutting down on your 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’re going to be dealing with higher mortgage rates, on top of the numerous other homeowner related fees.
However, just because you do happen to have poor credit, even if you’ve had a consumer proposal or a bankruptcy in your past, it is still possible to secure a high-risk mortgage. It may take a bit of extra time, money, and effort, but rest assured, your dream home is not totally out of reach. Just remember, if you’re ever having trouble finding a mortgage, Loans Canada is here to help you out.