People who have bad credit often believe that there is no way they will ever get a mortgage to buy their own homes. Fortunately, this is not the case. There are several ways to go about getting a mortgage, even if you have damaged credit due to bankruptcy or delinquencies.
Check Your Credit History for Discrepancies
The first thing that anyone should do before assuming that his or her credit is too bad for a traditional mortgage involves taking the time to review his or her credit history. In Canada, your credit score is a number between 300 and 900, and it reflects your use of previous credit. A vast percentage of people (nearly 80%) have at least one error on their credit history that affects this score. Look very closely, and be prepared to contact any creditors that you have already paid. Often, it does not take long to resolve these discrepancies once you report them.
Find the Right Lender
If your credit score is below 600, then most traditional lenders will deny your request for a mortgage. You can either work hard to boost your score, or you can find a lender who is willing to work with you. Otherwise known as "B" lenders or "subprime" lenders, they work almost exclusively with people who have less-than-perfect credit and they can certainly help you. However, if you have filed for bankruptcy or consumer proposal in the last two years, you may need to work with a private lender instead. If this is the case your mortgage broker should be able to help you find a private lender to suit your needs.
Save a Larger Down Payment
Whether you work with a subprime lender or a private lender, you will almost certainly need to save a larger down payment than usual. This helps offset some of the risks incurred by the creditor. You may need to save as much as 20% to 25% of the total purchase price of the home before any lender – including a private one – will consider your mortgage. There is an upside to this: with a higher down payment, you have the advantage to negotiate better interest rates.
Expect Extra Fees and Higher-than-Normal Rates
Lenders usually charge about 1% of the total amount of the loan as an application processing fee, and your broker (if you use one) may charge you another 1%. What's more, the interest rates vary enormously based on the type of lender you select:
- Prime Lenders – 3.49%
- Bad Credit Lenders - 5.49%
- Private Lenders – 10% to 18%
As you can see, private lenders can charge high interest rates as this mitigates some of the risks associated with lending large sums of money to individuals with low credit scores. Fortunately, if you make all of your mortgage payments on time and raise your credit score, you may be able to refinance later at a much lower rate.
Although a bad credit mortgage comes with a large down payment, fees, and a higher-than-usual interest rate, it is important to keep in mind that those rates will not apply forever. In fact, if you make timely payments on your mortgage while you work to get your credit back on track, it is possible to rebuild your credit enough to refinance at a better rate in the future.