What You Need to Know About Getting a Mortgage with Bad Credit
Having bad credit is not an ideal situation, but it's not the end of the world. The good news is that a bad credit score is only a temporary situation if you take the steps to repair it. If you work hard to pay off your balances, make payments on time every month and close unused credit cards you can start to rebuild your credit worthiness within six to 12 months.
Keep in mind that lenders will see several years of payment history on your credit bureau (usually 24 payments), but as your credit improves they will take your new behaviour into consideration - among other things.
While you should be working to improve your credit, you don’t need to let poor credit hold you back. If you want to buy a house don't let your low credit score stop you. Contrary to popular belief you can be approved for a mortgage with a less than perfect credit score, but there are some conditions.
Here's what you need to know about getting a mortgage with bad credit:
Your rate will be higher
If you're applying for a mortgage with a less than perfect credit history, don't expect to receive the advertised low rates. A lower credit score means potential higher risk for the lender and therefore they need to be compensated for taking the extra risk. Their compensation is in the form of your interest rate. You should expect to receive a higher interest rate, but at least you'll have a mortgage and a new home.
You may need a bigger down payment
Lenders can request more than the minimum down payment when approving mortgages for clients with lower credit scores. Once again this comes down to risk. The lower the down payment, the larger the mortgage loan and therefore the higher risk for the bank.
If you have less than 20% of the purchase price for a down payment you will also need to factor in the cost of CMHC insurance which protects the bank in case the client defaults on the mortgage loan. You can still get a mortgage with bad credit, but you may need to save up a little more first.
Use non traditional lenders
Banks may not be jumping to approve large mortgage amounts for clients with low credit scores. If you really want a home and don't have the time to wait until your credit score is up to par, you may need to search for non traditional or private lenders. They are willing to work with you if you have a larger down payment and are willing to pay the higher interest rate.
Agree to a shorter mortgage term
Being approved for a mortgage, making payments on time and paying off the balance will all help repair your credit score. According to the Globe and Mail, this is a good reason to accept a shorter mortgage term.
"Mortgage advisers usually recommend a one- to two-year term for non-prime borrowers. That gives people enough time to recover from credit woes and helps them avoid paying high rates longer than necessary. Experienced mortgage brokers can then coach borrowers on how to rebuild their credit and refinance sooner with a low-cost conventional lender."
Once your mortgage is approved you'll need homeowners insurance to protect your new property and your assets. Use our easy online tool to get quotes and compare prices.