How to get a mortgage with bad credit
When looking for a mortgage, loan, or even a new place to live, your credit rating is often taken into account. If your credit rating is good, you’ll most likely be approved without incident. But what happens if your credit rating is bad?
Defining good and bad credit scores
Before we discuss how to a mortgage with bad credit, we must first examine credit scores. Your credit score is a three-digit number that serves as an indicator of how likely you are to repay your debts. In Canada, this number ranges from 300 to 900, and the higher the number is, the more likely you will be to be approved for mortgages and the like. Lenders always take this number into account when considering you for loans, so make sure you are up-to-date will bills and other payments.
The following table breaks down the different credit score ratings and what they mean. Many lenders and financial experts deem a rating above 720 as the benchmark for an acceptable credit score.
| Range | Meaning |
|---|---|
| 300-599 | Poor credit |
| 600-649 | Fair credit |
| 650-719 | Good credit |
| 720-799 | Very good credit |
| 800-900 | Excellent credit |
The scores themselves are set and calculated by two prominent credit bureaus, Equifax and TransUnion. They use information contained in your personal credit file, such as how long you’ve had your credit account, the amount of debt you carry and your payment history to determine your final score.
How does a credit score go bad?
If you credit score is low, it could be due to a number of factors. These include:
- Defaulting on loans
- Filing for bankruptcy
- High credit card balances
- High loan balances
- Payments that are frequently late or missed
- Too many credit applications
- Too many open credit cards or accounts
Most of the time, a sub-par score is the result of negligence, but there are some instances where it is not the person’s fault. This may be due to limited funds after losing a job, going through a bad divorce or being the victim of fraud or identity theft. If the latter is the case, make sure you notify your bank or credit card provider as soon as you detect unusual activity on your account. They may be able to provide you with helpful advice and propose solutions.
Having a knowledgeable mortgage broker in your corner can also ease your burden. Not only can they dispense solid advice; they may also be able to introduce you to alternative lenders who specialise in helping people with bad credit get mortgages.
The application process
Having bad credit is never a good spot to be in. But despite that, it doesn’t necessarily rule you out of obtaining a mortgage for your home. While banks might turn people with bad credit away, you may be able to tap into the alternative lending market.
When you’re ready to take the leap and apply for a mortgage, the lender will examine your financial history to determine your level of risk. The criteria for approving or denying loans differs from one lender to the next, but many of them rely on the following criteria for applications:
- Higher down payments. The majority of banks and lenders require a down payment of at least 5 per cent for purchasing a home. If your credit rating is low, that figure may triple. However, it’s not all bad news, as a larger down payment has a better chance for approval.
- Proof of income. This is a requirement for all mortgage applications, regardless of the applicant’s credit rating. It shows the lender that you will be able to pay off the loan. When considering your application, the lender uses a formula known as the Gross Debt Service Ratio (GDSR) which determines the amount of your monthly income that will be used to pay off the mortgage. It is best practice to keep your GDSR under 30 per cent, although some lenders will approve borrowers with a GDSR of around 35 per cent.
- Appraising your property. The lender will perform a professional assessment of your property to ascertain that its value is greater than that of your mortgage. In the event that you default on the loan – which can be detrimental to your credit score – the lender will legally be able to repossess the property and sell it off to recoup their capital.
- Working with a co-signer. The likelihood of your mortgage application being approved increases if you approach the lender with a co-signer. This individual can be a friend or relative who can not only vouch for your ability to submit your payments, but can also make them on your behalf should you be unable to do so yourself.
Alternative lending solutions
In some cases, you might need to gain a mortgage approval due to urgent or extenuating circumstances, and unable to qualify through the typical channels. This is when consulting with a mortgage broker about alternative options may be helpful. Mortgage brokers typically have access to various lending products ranging from banks to private lenders. A mortgage broker can assess all aspects of your application to determine if there are alternative lending options through private or non-bank lenders. It's worth noting that alternative and private lenders typically charge significantly higher interest rates, charge fees and lend for shorter terms. You should always ask for complete information upfront; including charges and renewal options.
Turning a negative into a positive
No one wants to be in a situation where they have bad credit or none at all. It casts a shadow on your ability to pay off your debts and can lead to instant rejection from banks or other lenders. But despite that, many have been able to get a mortgage with bad credit. If your credit rating is in need of a boost, speak to a financial advisor and start your journey to a better financial situation today.
