Can You Buy a Home with Bad Credit?
To start, let us reassure you by saying that you CAN buy a house. Whether you have declared bankruptcy or have very bad credit, it is possible to purchase a dream home like you always wanted to! The only difference is that you will have to pay more for a mortgage than someone who has a better credit history. Here are a few things to consider and other options for you to be able to get a mortgage.
A credit is an agreement between you and a financial institution in which they lend you a maximum amount of money in which you will have to pay back over a set amount of time. A credit score is an indicator for this institution to determine whether you would be able to pay off this loan based on your financial history. To learn more about the difference about credit scores, credit history, and a credit report then read this article. This will help you understand how the institutions assess your financial situation and the resources that are needed.
The Waiting Game
Thousands of Canadians currently have bad credit. In fact, according to this article by Globe and Mail, more than one in eight adult Canadians will declare bankruptcy or negotiate a debt settlement – consumer proposal – with creditors. That’s a lot of people who will be known as “high-risk” mortgage borrowers. What this means is that many high level lenders will dismiss you for at least 2 years or until your situation gets better. This is due to the ‘risk’ the borrower and the lender will be taking on this mortgage and whether it will be paid on a monthly rate. Your best option would be to wait for at least two years and ensure you have stable employment and a provable income. This could help build your credit, while also allowing you to save up for a downpayment.
If you decide to take the route for waiting and letting your credit report improve, here is an article on how you can improve your score!
Higher Down Payment
If you cannot wait for two years, there is another option available. A house less than $500,000 in Ontario requires a minimum of 5% of the house’s value as a downpayment. Instead of putting down only 5 percent with a recognized lender, you will need to put down through an insured private lender at least 25 percent. Additionally, your interest rate will be higher; looking at around 10-15%.
Some mainstream lenders will offer a mortgage to someone with a low credit, but with premium fees. You can be looking at paying an extra 4-5% in addition to a lender/broker fees of 1-2% more. However, this is all dependent on the stability of your income and the reasons behind the low credit. If you are able to provide with a ‘reasonable’ explanation for your financial situation, your percentage can decrease by ¼ points. A ‘reasonable’ explanation being bankruptcy caused by a medical crisis rather than a shopping addiction.
An Extra Friend
If you are planning on buying a house, it is a good idea to have a reliable co-signer. A lender is much more likely to approve a mortgage as it reduces the lender’s risk. Having a close family friend or another family member as your co-signer will mean that if you are unable to make payments, your cosigner will be required to.
In order to qualify for a mortgage, lender will use a formula to determine if your income would suffice a monthly mortgage payment. They take a look at the gross debt service ratio which is the percentage of your income that is needed to pay your monthly housing costs. Typically, it is recommended to have a ration of about 30%, however, with a bad credit, it would be ideal to have your percentage be in the 35% range. To see how you can calculate your gross debt service ration, read this article.
If you have bad credit, little credit, or even filed for bankruptcy, you are still able to secure a mortgage for a new home. Just ensure you are taking the right steps and are prepared for what is required for you to do. Find yourself a good mortgage broker that represents your best interests and guides you down the entire path. There is always hope, and we hope you find the perfect home for you and your family!