How to get a mortgage when you have bad credit?
With the recent changes in mortgage application guidelines, more and more Canadians are having their mortgages rejected, even if you have a steady stream of income, being self-employed can be one of the reasons why your mortgage loan was not accepted. On top of all of this, if you have a bad credit score, you may think that there’s no way your application will make the cut. Well, you don’t have to lose hope as there is a solution and it’s known as bad credit mortgages. In this blog post, we will be discussing in detail om what bad credit mortgages are, the key requirements for you to be eligible for such a policy and how this loan can help you but that dream house of yours.
Denied by the bank? Don’t stress it
As the Covid-19 pandemic is still running rampant across the world, a majority of Canadians have seen their fair share of hard times in the past two years. Even if you have regained financial stability and want to start life afresh by purchasing a new home for your family, you might face several challenges just with the mortgage process. As traditional banks have made changes towards their mortgage policies, mortgages have become harder to come across unless you have a very high income and an excellent credit score. This is where bad credit mortgages come in.
This type of mortgage is available through alternative lenders and through other channels that are not well-known for mortgages. They are also known as B lenders or private mortgage lenders and there’s a large community of these private mortgage lenders available at your service- all you have to do is get in touch with them. Most of the private lenders do not emphasize your credit history. Instead, what they look at is the condition, value, marketability as well as location of the property you’re planning to purchase. By doing this, they are mitigating their risk through the property rather than through the borrower.
Eligibility criteria for a bad credit mortgage
When it comes to the eligibility criteria for a bad credit mortgage, you will be glad to know that it’s much easier than for a traditional mortgage. Here are a few steps on how you can be eligible for a bad credit mortgage with ease.
- Start saving for a large downpayment: If you had an excellent credit score, you would’ve been able to get away with as little as a 5% downpayment on the market price of a property. With a bad cr6edit score, you might want to save up at least 15-20% as a down payment of total cost. The more you will be able to invest the more likely your mortgage lender will approve your loan and also provide you with a preferred interest rate.
- Prove your monthly income: As you are filling up the mortgage application, you would have to prove that you have sustainable income and would be able to meet the monthly repayments. Generally, lenders use the Gross Debt Service Ratio and Total Debt Service Ratio formula to calculate if a borrower will be able to afford their monthly mortgage payments. If you have a bad credit score aim to keep your GDS and TDS below 30%.
- Appraise your property: A professional property appraisal will give your lender a realistic estimate of the value of your home. Once that’s done, lenders use the Loan to Value (LTV) ratio as an assessment tool on how risky the loan would be.
- Co-sign your mortgage: If you can meet this criterion, it instils a lot of confidence in the lender. What happens here, you find someone who can co-sign the mortgage deed with you (be it a friend or a family member). In the unfortunate scenario where you are not able to complete your mortgage repayment for a month or two, your co-signer will pay the amount on your behalf. Therefore, it is a guarantee that the loan will be paid.
- Cross collateralization: If you are not able to save a larger down payment, consider adding a second property, this can be a friend or family member’s property as well for cross collateral. In several cases, the overall LTV ratio is calculated based on both properties and their respective loans and this can reduce the overall risk for the lender. It does so by decreasing the combined LTV which will often allow you to put down a lower down payment and get a lower mortgage interest rate with better terms and conditions.
You can also try improving your credit score
This is a very good option if you’re not in a hurry to purchase a property and your credits score and not up to the mark for a bad credit mortgage as well. You can take the time to clear off all your dues and loans, pay off all the high-interest credit card bills and slowly watch your credit score rise. After some time, check your credit report, if you find any mistakes, get it corrected and update your report again. Having a good credit score will not only help you secure a mortgage quickly but you would be eligible for lower interest rates as well.
The pros of a bad credit mortgage
- Your mortgage would be approved quickly and you will have access to the funds in no time. The application can be approved as quickly as in less than 48 hours.
- In most cases, there is no credit check done when someone is applying for a bad credit mortgage. The criteria may vary from lender to lender.
- Once you start paying your mortgage back, (if you’re paying every month on time) you will notice that your credit score is slowly improving. If you can show that you’re trying your best to improve your credit score, you may be able to refinance your bad credit mortgage as well.
Initially, a bad credit mortgage may sound like a bad idea, however, if you think about it, in the long run, it can help you improve your credit score. You will have access to quick funds as well. Not to mention, you will be able to purchase a property. For further details on bad credit mortgages, get in touch with your local mortgage broker.