Getting A Mortgage With A Bad Credit Score is not as hard as you think. 87 percent of Canadian homebuyers say they’re confident that purchasing a home is a sound long-term investment. Owning a home remains a major aspiration for Canadians, with homeownership rates hitting a staggering 66.40 percent in 2017. It’s one of the highest homeownership rates on the planet.
Thanks to mortgages, aspiring homeowners can see their dream for homeownership come true. Of course, getting a mortgage becomes a much easier process when you have a good credit score.
So, what happens when your credit score isn’t stellar? Can you still get a mortgage with a bad credit score?
The simple answer is yes. There are several options for people in your situation. To help you do things right, we’ve prepared a comprehensive guide on getting a mortgage with a bad credit score.
What Is a Credit Score?
A credit score refers to a number that indicates a consumer’s creditworthiness. This number ranges from 300 to 900. The higher your score, the better you appear to potential lenders. Generally, consumers with the best credit scores can enjoy the most favorable mortgage rates in Canada.
Your credit score depends on your credit history. It’s calculated based on the number of your open accounts, the total levels of your debt, and other relevant factors. Using your credit score, lenders can evaluate your probability of repaying your loan in a timely manner.
Canadians get assigned their credit score by the country’s two major credit bureaus, Equifax and TransUnion. A credit score above 680 is considered good, while a score below 600 is deemed poor. 600 to 679 is considered a fair credit score.
How to Get a Mortgage With a Bad Credit Score
No one wants to end up with a bad credit score, but life happens, and you find yourself in this situation. If you’ve checked your credit score and it doesn’t look good, it doesn’t mean your aspirations of owning a home are dead. You can still get a mortgage and buy the home of your dreams.
Check out these suggestions on how to go about it.
Look for Bad Credit Mortgage Lenders
Big lenders in Canada require consumers to have a minimum credit score to approve them for mortgages. If your credit score is below 600, getting a mortgage from these banks is hardly possible.
Thankfully, you can find a bad credit mortgage lender to give you a home loan if your credit score doesn’t meet the threshold set by major lenders. These institutions are usually known as subprime lenders. They specialize in giving home loans to consumers whose credit scores are less than ideal.
Keep in mind that working with a subprime lender usually attracts extra fees that you wouldn’t have paid working with an A lender. Most charge a loan processing fee, but it’s a tiny percentage of your overall mortgage value.
If you’re working with a poor credit mortgage broker, you’ll most likely need to pay them for their services. That’s because lending institutions don’t usually compensate mortgage brokers when financing consumers with bad credit. The good news is that the fees you pay your mortgage broker is a tiny percentage of your mortgage, just like the mortgage processing fee.
Save a Higher Down Payment
Lending institutions don’t look at your credit score only when considering your application for a mortgage. Other factors come into play, including your down payment size.
Canadian lenders typically require five percent of the home’s buying price as a down payment. If you have a poor credit score, the lender may demand a larger down payment. That’s because borrowers with weak credit scores are riskier to lend to.
So, what size of a down payment should you have when applying for a bad credit mortgage? Consider saving between 20 and 25 percent of your potential home’s purchase price.
A sizeable down payment signals that you’re financially stable and can own a home. It also reduced your monthly mortgage payment amounts. In addition, a 20 percent down payment saves you from paying for mortgage default insurance.
Find a Co-Signer
Another practical option for Canadians with bad credit to get a mortgage is by having a co-signer on the home loan. In this case, a third-party acts as a guarantor of your mortgage. The co-signer commits to pay your monthly payments in case you can’t.
One of the best things about having a co-signer for your home loan is that you can access lower mortgage rates. That’s because your co-signer is a co-borrower, meaning their credit score and income are considered when lenders are reviewing your mortgage application.
By agreeing to be your co-signer, the third party is taking a huge financial risk. It means that they’re financially responsible if you stop making payments. That’s why in most cases, co-signers are people closely related to the borrower, such as their relatives.
The consignee also incurs some risk. Most lenders require the co-signer to become part-owner of the house, meaning their name will appear on the title. This arrangement could lead to disagreements between the two of you when it comes to selling the home.
Working Towards a Renewal
As you’ve seen, bad credit mortgages have certain drawbacks. But there’s good news for bad credit borrowers. Once you’ve gotten a bad credit mortgage, you can still renegotiate it at the end of your term.
In Canada, bad credit mortgages usually have a term of five years. This is a lot of time for you to turn your financial situation around and improve your credit score. When your renewal date comes, you can renegotiate terms afresh or move from a subprime lender to an A lender, which would mean lower interest rates for you.
You Can Get a Mortgage With a Low Credit Score
For many Canadian aspiring homeowners, a low credit score is a major source of worry. But a less than ideal credit score should never spell doom for your plans to own a home. With some research and determination, you can find a mortgage with a bad credit score and make your dreams of homeownership a reality.
Are you an aspiring homeowner looking for assistance getting a mortgage? Please, contact us today and kickstart your journey towards owning a home.