Do you know it’s possible to get a mortgage even if you have bad credit? As you might already know, your credit score plays a vital role in obtaining a mortgage. It determines your financial health and mortgage lenders will check your credit history to make sure that you manage your finances properly. The purpose of doing this is to find out if you can afford the monthly repayments of the loan. A good credit score is preferred because it shows that you have been careful about making repayments in the past and less likely to default- even if interest rates go up. But what if you have a poor credit score?
A credit score is a crucial factor in qualifying for the best mortgage rates. However, a poor credit score doesn’t mean you can’t get a mortgage. Many homebuyers wonder if they can buy a home with poor credit. It can be difficult to obtain a mortgage with bad credit but not impossible. Some lenders offer mortgages known as bad credit mortgages or sub-prime mortgages that are specifically designed for people with poor credit. However, you need to remember that your credit score is not permanent and it’s possible to improve it with some financial adjustments to get better interest rates. So, before we learn ways to improve credit score, let’s first understand what exactly credit score is.
What is Credit Score?
A credit score is a number assigned to you based on your financial habits to indicates how likely you are to make repayments on your loans. Canadians are assigned credit scores between 300 and 900. This score is assigned by a credit bureau – Equifax and TransUnion that are Canada’s two major credit bureaus. This number is derived from your credit history and tells your creditworthiness. With a higher credit score, you will have more chances of securing the best mortgage on the market. A higher score will help you qualify for the lowest possible mortgage rates. Typically, the credit score is calculated based on your payment history, outstanding balances, credit history current credit accounts, and other factors. A score under 599 is usually considered poor, 600 to 679 is fair, and above 680 is good. However, the score criteria may vary by lender.
How to Get a Mortgage with Bad Credit?
The factors that make it difficult to obtain a loan are missing credit card payments and defaulting on a previous loan. A poor credit score hurts your chances of getting a mortgage but it’s possible to change that. The major banks in Canada may reject your loan application with a credit score lower than 600. In that case, you will need to find private lenders to get a mortgage with a low credit score. Here are some tips to get a mortgage with a bad credit score.
The best option is to wait for some time before applying for a mortgage to improve your credit score. During this time, you should try to pay bills on time and in full. Making repayments on time, clearing unpaid debt, and not using more than 30% of your available credit card limit will help in increasing your credit score. It is also recommended to review a copy of your credit report to identify mistakes. Improving your credit score is the best way to secure a lower mortgage rate that will cost you lower monthly mortgage payments.
Besides credit score lenders also consider other factors when approving your mortgage. These other factors include your current income, amount of down payment, and so on. Generally, the minimum requirement for a down payment is 5% of the home’s purchase price. However, as you increase the amount of down payment, the lender will see you as financially stable and may help you get better rates. Those who have bad credit scores should consider making a 20-25% down payment.
Another option for borrowers with low credit scores is adding another applicant with a good credit score. Another party with a good credit score will help you access better mortgage rates because your co-signer will act as a co-borrower. The lender will consider the financial situation of both applicants and that will increase your chances of getting a better mortgage.