Bad Credit Mortgage
Many Canadians dream of one day owning their own home. But if you have a bad credit history, it can sometimes seem like it’s impossible to ever get a mortgage. But there is hope. Even with poor credit, it is usually still possible to get a mortgage through a private or alternative lender.
Bad credit vs. no credit
Oftentimes people are turned down for mortgages because they don’t have enough credit history. Perhaps you yourself have never even had a credit card because you didn’t think you needed one. But that can make getting a mortgage harder because without a credit history, lenders can’t tell if you are a reliable borrower.
In other cases, some people have had credit in the past, but due to unforeseen circumstances, they just had trouble keeping up with the bills. That doesn’t mean that they’re still in that situation, and it doesn’t mean they can’t get a mortgage.
No matter which situation you find yourself in, you can still get a mortgage and buy a home for your family. Our brokerage has worked with many people in difficult credit situations and has helped them to become homeowners.
Reasons You Might Need a Bad Credit Mortgage
There are a number of reasons why you might need to apply for a bad credit mortgage. These reasons include:
- Having a poor credit score
- Not having any established credit
- Having previously gone through a bankruptcy or consumer proposal.
- Are a newcomer to Canada.
- Are an offshore investor without a credit history in Canada.
- Are self-employed and cannot verify income by traditional means.
How much do you need to save to buy a home with bad credit?
When it comes to buying a home, credit is just one part of the process. While it is a big part, there are other items you will need to get in place before you can buy a home.
When you purchase a home, you will need a down payment in order to secure the financing. Usually, you will require a minimum down payment of 5% - but of course, if you can make a larger down payment, it is to your advantage to do so, as it will mean that your mortgage payments will be lower.
Additionally, you should have funds available for items like lawyers’ fees, land transfers and title searches. And, if this is the purchase of your first home, you may qualify for certain rebates and government incentives.
And if this sounds complicated, don’t worry. Our agents will be with you every step of the way to help you through the process.
Have An Attractive Application
Mortgage lenders are understandably leery of granting mortgages to those with poor credit. Because of this, if you do have bad credit, it is of the utmost importance that you make your mortgage application as attractive to them as possible. This will show any potential lender that you are serious about making your payments.
To make your mortgage application as attractive as possible, you will need to gather all of the documents that your mortgage broker asks you for. This will usually include things like your Notice of Assessment, pay stubs, and other financial documents.
For example, if you’ve been working at the same job for a long time – and getting a steady income – this is something that a potential lender would want to see. To obtain a supporting document for this, you may need to go to the HR department where you work and ask for a record of employment.
Including these kinds of supporting documents in your application can go a long way to help you get approved for a bad credit mortgage.
Why You Should Get Pre-Approved For A Mortgage Before You Start House Hunting:
Regardless of how good or bad your credit is, it is important to get pre-approved for a mortgage before you start looking for a home. Your pre-approval will let you know exactly how much of a home you can afford and give you an idea of what your mortgage payments will be once you become a homeowner.
Also keep in mind that many real estate agents will not work with you unless you’ve already been pre-approved for a mortgage.
During your application process, you will work with one of our agents, who will explain your various mortgage options and then work to find you the right type of mortgage and lender that suits your needs.
Why you should get pre-approved for a mortgage before you start house hunting.
Regardless of how good or bad your credit is, it is important to get pre-approved for a mortgage before you start looking for a home. Your pre-approval will let you know exactly how much of a home you can afford and give you an idea of what you mortgage payments will be once you become a homeowner.
Also keep in mind, that many real estate agents will not work with you unless you’ve already been pre-approved for a mortgage.
During your application process, you will work with one of our agents who will explain your various mortgage options and then work to find you the right type of mortgage and lender that suits your needs.
Tips for Getting a Mortgage When You Have Poor Credit.
Poor credit history shouldn’t prevent you from becoming a homeowner. Here are a few tips that can help you get a mortgage even when you have poor credit.
We work with dozens of lenders, some of whom specialize in offering clients debt consolidation loans. Getting out of debt can be very difficult, for anyone, and we know it can be hard to ask for help in paying it back. We are here to work with you and get you the loan on the terms and payments that will work for you, so you know exactly when you will be out of debt.
Save a Larger Down PaymentTypically, first-time homeowners only need about 5% of the purchase price of the home (depending on the purchase price); however, if you can save more than the 5%, it can help your case for purchasing as it shows you have financial stability.
Think About Getting a Co-signerAnother option if you’re looking to get a mortgage with bad credit is to get a co-signer. A co-signer is a person who acts as a guarantor for your mortgage. If you become unable to make your mortgage payments, then your co-signer is equally responsible for making the payments.
By getting a co-signer who has good credit to vouch for you, you will be adding a lot of strength to your mortgage application.
Important: If you do get a family member or friend to co-sign for you, it is important to remember that they are putting a lot of trust in you. If you default on your mortgage, they become legally responsible for making the payments. Getting a co-signer, therefore, is something that should never be undertaken lightly.
Proof of incomeBeing able to demonstrate proof of income is incredibly important when it comes to getting a mortgage with bad credit. Lenders will want to know that despite your bad credit, you still have a regular paycheck and that you will have the ability to make your loan payments.
Typically lenders will look at something called a Gross Debt Service Ratio (GDSR). The GDSR is a formula that determines how much of your monthly income will be needed in order to pay off your mortgage.
Bad credit mortgage lenders will typically allow your GDSR to be as high as 35%, but it is recommended that you keep your GDSR to no more than 30%. So if you figure out what 30% of your income is, that should be the maximum payment that you’ll want to make on your mortgage each month.
Professional Property AppraisalThe main recourse that any lender has when a borrower defaults on their mortgage is to take possession of the property and sell it. This allows them to recover the money that they lent out in the form of a mortgage.
In order to know how much risk they are taking, a lender will often want to know the value of the property. For this reason, they will usually require a professional property appraisal.
Because mortgage brokers have professional contacts with property appraisers, they can help you with this as part of the mortgage application process.
Work with a BrokerIf you only go to one financial institution, then you are limited to the financial products they can offer. However, if you choose to work with a mortgage broker, you will have the doors opened to working with dozens of lenders across the country. Our brokerage has many connections with lenders who specialize in working with those who have a poor credit history.
Mortgage Refinancing and Second Mortgages with Bad Credit
If you are already a homeowner, but you have bad credit, you may want to talk to your mortgage broker about mortgage refinancing. Refinancing your mortgage may be a way for you to save money on interest or even to consolidate your debt so that you can pay it off more quickly. Over time, strategies like these can help you to improve your credit rating.
Mortgage Refinancing vs. Second Mortgages
Mortgage refinancing is when you break your current mortgage in order to get a new one. This can save you money on interest and allow you to borrow from your home equity, but it is important to remember that there will be a financial penalty to pay for breaking your first mortgage.
With second mortgage, there is no need to break your first mortgage so you will not have to worry about paying a financial penalty. It is important to remember, however, that second mortgages usually have a slightly higher interest rate than mortgage refinancing.
Usually, in order to figure out which of these two options is the most cost-effective for you, you will have to speak to your mortgage broker. Your mortgage broker can run the necessary calculations in order to determine which option is going to save you the most money.
Know How Much Equity You Have in Your Property
If you are deciding to refinance or to get a second mortgage with a private lender, it is a good idea to know how much equity you have in your property. Your home equity accumulates in two ways:
- By paying off your mortgage.
- By property values increasing.
Say you purchased your home at a price of $500,000, and you have $200,000 still owing on your mortgage. That would mean (in most cases) that you would have at least $300,000 in home equity.
But in truth, you properly have more than that since it is highly likely that your home has increased in value since you bought it. So let’s say that your home is now worth $800,000. With $200,000 still owing on your mortgage, you would actually have $600,000 in home equity.
Since most lenders allow you to borrow up to 80% of your home equity, that means that you could potentially borrow up to $480,000 through mortgage refinancing or through a second mortgage.
It is important to note however that the more you wish to borrow, the more documentation that some lenders will require. If your home has gone up significantly in value, you will likely need to get a home appraisal before being approved for a loan. Don’t worry, though – this is something that your mortgage broker can help you with.
Know What You Should Expect
While having poor credit doesn’t necessarily mean that you can’t get a mortgage, it is important to understand that it will likely mean you won’t get the lowest posted mortgage rates.
That being said, it is still often a very good idea to refinance or to get a second mortgage if it means that you will be able to get out of debt faster and repair your credit.
Your mortgage broker can help to match you with a lender or private lender who specializes in helping people with bad credit.
Contact us today
Having a poor credit history and searching for a mortgage can seem like they don’t go together, but the fact is, there are many options available. We are here to work with you and make sure that you can purchase a home for your family to grow in. We understand that it can be hard to even approach a lender when you know that your credit history is less than ideal, but you don’t need to feel embarrassed – we work with clients in all situations, and we have the experience to help you find a solution. Don’t put your dream on hold for any longer; contact us today!
Bad Credit Mortgage FAQ's
Everyone’s financial situation is different, so this isn’t a yes or no question. In working with you, we will look at your specific circumstances and determine whether it will affect you or not – and what you can do about it. We can discuss your options soon with a virtual appointment or call.
With all of our clients, we start with an application for a mortgage and that will give us all the information we need to start the process. We will start there, and determine what the next steps should be - including potentially a pre-approval for your mortgage. Contact us today!