Buying a house is considered one of the most significant moves in one’s life. But sometimes it can be tough due to other consequences such as a bad credit score. In addition to that, the pandemic has turned the situation upside down, people have lost their jobs and are facing financial troubles. In such times, the dream of buying a house can look distant. But worry not because we are here for you and in this article, we will show you how to get a mortgage with bad credit.
A Mortgage with Bad Credit
For buying a home, it is very common in Canada that people opt for a mortgage. 40 percent of the overall Canadian population and every 9 out of 10 Canadians apply for a mortgage loan for buying a house. With the soaring house prices and tough financial situation, it is very common that you may end up having a bad credit score.
There are various reasons for having a bad credit score as mentioned below.
- Exceeding credit limit.
- Not paying that on time.
- Pending money you cannot afford.
- Not having financial discipline.
- Applying for too many loans and credit cards to stop too many hard checks on your credit score.
Well but having a bad credit score is not an end and you can easily turn it around in your favor.
What is a Bad Credit Score?
A credit score is a number that suggests how responsible you are in terms of paying your credit back. It shows your credibility in taking care of your finances. In Canada, 660 is considered the average credit score. Various factors such as credit card usage, repayment history, credit card payment method, etc. can impact your credit score. Below is the range of credit scores in Canada.
741 – 900 = Excellent
690 – 740 = Good
660 – 689 = Average or Fair
575 – 659 = Below Average
300 – 574 = Poor
In Canada, there are two main credit report agencies namely Equifax and TransUnion that will let you check your credit score.
A lower credit score means that your profile is risky and you may not be able to repay the amount on time. This will also lead you to opt for a subprime mortgage which is quite costly. Below were ways that will provide you with access to having a mortgage with a bad credit score.
Ways to Buy a Home by Getting a Mortgage with Bad Credit
1. Save a Large Amount for Your Down Payment
In Canada, the minimum down payment looks like the following.
Minimum Down Payment
|$500,000 or less||5% of purchase value|
|$500,000 to $999,999||5% of the first $500,000 of the purchase value|
10% for the portion of the purchase value above $500,000
|$1 Million and more||20% of the purchase value|
If you are paying a down payment of less than 20 percent, then you will also have to purchase mortgage default insurance which is also called CMHC insurance as well. But as you have a lower credit score you may also attract a higher interest rate.
In order to avoid that, you can save a larger amount for your down payment. This will also provide your mortgage lender with the sense that you have financial stability even when you have a bad credit score. This is one of the best ways to get a mortgage with bad credit.
2. Improve Your Credit Score
It is the foremost step that you must take if you are looking to buy a house with a lower credit score. The following way will help you to improve your credit score over time.
Use Your Credit Card Under the Limit:
It is said that you should have 30 percent of your credit limit free every month in order to improve your credit score. It means that if your credit limit is $100 you can use $70 but the spare the $30.
Do not Apply for Multiple Credit Cards:
If you have a bad credit score, it is advisable for you not to apply for too many credit cards because that will attract hard checks on your credit, and that will reduce your credit score significantly.
Pay Your Bills in Full Every Time:
When you pay your bill and do not miss any payment it shows up in your credit score. Whether it is a credit card bill, a car loan, or an education loan, pay that every month in full.
Have Your Latest Account:
In calculating a credit score, your credit history matters. The longer the credit history, the better it would be to spread your overall usage and that will help you improve your credit score over time.
3. Look for a Mortgage with Bad Credit
As earlier said, you will need to have 600 as your credit score if you want to have a traditional mortgage. But that’s not possible if you have bad credit so the next option is a subprime mortgage. In Canada ‘B Lender’ provides a subprime mortgage. Here you will not enjoy a lower interest rate or favourable terms because the profile is already risky but you will definitely get a mortgage to buy a house.
Please ensure that the lender that you opt for is reliable. This mortgage will cost you a lot and if your mortgage lender is not reliable or trustable, it can be a disaster for you. Typically a ‘B Lender’ would charge 1 percent as a processing fee on your overall mortgage value, and if you are finding subprime lenders through a poor credit mortgage broker, that would also add 1 percent.
Now you may think that 2 percent is not high but if you apply it to your overall mortgage amount, it will be significantly high. For example, if your mortgage amount is $300,000, these charges would be $6000 which is quite high.
4. Apply for a Mortgage with a Co-signer or Joint Mortgage
This is an option that you have if you want to get a good mortgage without opting for ‘B-Lender’. If you have a co-signer on your mortgage account, the co-signer works as a guarantor that if you fail to pay your installment, he or she will pay it on your behalf.
It provides the mortgage lender with the surety that his money is safe. If you are living in a property and sharing it with your friends or your other family members, you can also jointly apply for a mortgage. It will work the best for you as their credit score will also impact your credit score and if the overall credit score is good, the interest rate can be favourable.
5. Renegotiate Your Term at the Next Renewal
There are chances that you may opt for a subprime mortgage but generally, the term of a mortgage is 5 years. It will provide you with enough time to improve your credit score and in the next renewal, you can have better terms in the interest rate and installment. This will help you get a mortgage with bad credit.
You may have some shortcomings in the near term, but in the long run, when you renew your terms, the situation will favour you. Kindly avoid the mistake of renegotiating it with the current lender at a higher rate if you think that you can improve your credit score.
6. Rent House for a Little Longer
This is one of the ideal situations if your credit score is bad. You can rent a house for a little longer and in the meantime save for a larger down payment, improve your credit score, and improve your overall financial condition. Buying a house is quite costly and thus you have to plan strategically.
Buying a house with bad credit would cost you a lot in interest rate as well as the monthly installment. It is a wise decision to have a house on rent for some time than to have a house on your own but not able to meet your daily needs.
Having a bad credit score is not an end and you can improve it with financial discipline. Changing your financial habits will simply help you improve your credit score. I hope that this article helps you buy a mortgage with bad credit and help you in your house-hunting process. All the best!