Tips for Securing A Mortgage When Your Credit Score Is Low
Having bruised credit can be a big roadblock when it comes to securing a mortgage and buying a house. But it doesn’t mean it’s totally impossible.
There are steps you can take to improve your chances of buying a home and securing a mortgage when your credit score is not ideal, making your homebuying aspirations not so far out of reach.
Challenges of Buying A Home with Poor Credit
Credit history is a considerable factor in the mortgage approval process as lenders typically prefer lending to borrowers they deem low risk who are less likely to default on mortgage payments.
Therefore, having bruised credit can often stand in the way of homeownership.
Here are a few of the main challenges of purchasing a home with poor credit history.
Lenders Are More Reluctant to Give You A Mortgage
When deciding whether or not you qualify for a loan, mortgage lenders look at a variety of factors, but your credit score is one of the most significant influences.
If your credit score is below 620 and/or you have recently filed for bankruptcy or a consumer proposal, your risk of being denied for a mortgage is much higher than those with a strong credit history.
Higher Interest Rates
While people with higher credit scores – 720 or higher – often get lower interest rates and more favourable terms on a loan, those with bruised credit are automatically perceived to be a higher risk. And if they are able to get a loan, they more often than not end up paying higher interest rates and receive less appealing mortgage terms.
Factors Lenders Consider When Approving A Mortgage
Lenders will consider any of the following factors when reviewing your mortgage application:
- Credit history
- Employment history
- Debt-to-income ratio
- The size of your down payment
- Capital – savings, investments, and other assets that can help repay the loan
Tips for Securing A Mortgage with Bruised Credit
If you do have bruised credit and are looking to purchase a home in the near future, don’t give up hope just yet. There are several steps you can take to improve your chances of obtaining a mortgage when your credit score isn’t ideal.
Work to Improve Your Credit
The best way to improve your chances of securing a mortgage is to work towards repairing your credit. This can be done by:
- Not procuring any additional credit
- Paying off your credit cards
- Not missing any debt payments
- Getting a secured credit card
- Not maxing out any credit cards or getting too close to the limit
- Increasing your credit limit but not using any newly available credit.
Correct Errors on Your Credit Report
Credit reports aren’t always 100% accurate, so it’s important to review yours carefully to ensure there are no inaccuracies.
Here are some examples of mistakes that can appear on your credit report:
- Someone made a mistake when entering your name or address
- Loan or credit card payments may have been accidentally applied to the wrong account
- Some accounts may have been reported more than once, making it seem as if you have more debt or open lines of credit than you actually do
- Falsely showing that an account closed by you was closed by the creditor
- Older bad debts that should have been removed from your credit report were not taken off
- Unverified accounts and bad debts due to identity theft
If you spot any mistakes on your credit report, it’s crucial that you contact the credit bureau – either Equifax Canada or TransUnion – to dispute the information.
You will need to have receipts, statements, and other documents related to your credit accounts to help support your case.
An investigation will be launched to determine the validity of your claim before your credit report is updated.
Save For A Sizeable Down Payment
Borrowers with strong credit can put as little as 5% of the purchase price as a down payment.
Borrowers with bruised credit on the other hand are considered higher risk and will often be asked to put down as much as 20% in order to secure a loan.
While this means you may have to wait a bit longer to save up enough money to buy a home, the upside is that you will end up with more home equity.
Find Stable Employment
Employment history is another big factor that lenders consider when reviewing mortgage applications.
In fact, household income often weighs just as heavily as credit score, as lenders want that extra assurance that borrowers have the capacity to pay them back and won’t default on payments.
Therefore, if your income is considered “confirmable” through the Canada Revenue Agency’s notices of assessment, your chances of securing a mortgage will improve.
However, even if you have “unconfirmable income,” rather than postponing buying a home, talk to your mortgage broker about borrowing from an alternative lender and then refinancing to best rates and terms in 12-24 months when your income is more stable.
Consider A Private Mortgage
If you are still unable to obtain a traditional mortgage through your mortgage broker, you may want to consider a private mortgage.
Private mortgage lenders are often individuals lending their own money or a small group of investors, and are usually not as strict as banks when it comes to lending money.
Since they are not required to follow the same rules as banks, they have more discretion and flexibility when it comes to lending guidelines and the ability to set their own rules and restrictions.
This means they are often more willing and able to offer loans to borrowers deemed high risk by traditional banking and financial institutions.
The downside is that your loan will likely come with significantly higher interest rates due to the increased risk of lending funds.
Improving your credit while also saving to buy a home takes time and can be frustrating when all you want to do is move forward with your life and leave your past credit problems behind you.
However, it’s important to be patient during this time as buying a home is a big life decision that shouldn’t be rushed.
Try to stay focused on your end goal and work hard to get there. Because with a bit of luck, patience, and a lot of hard work, you will eventually get there in time.
Work with A Mortgage Broker
Working with a mortgage broker can help make your home buying dreams a reality, even if you have bruised credit.
Because contrary to popular belief, homeownership is a possibility for those with bad credit as long as you remain committed to improving your credit score and getting yourself back on track.
A mortgage broker will help you gain a better understanding of your financial and credit history so you can work towards making improvements, qualify for a mortgage, and get one step closer toward reaching your goal of becoming a homeowner.