You may be considering getting a mortgage but your credit score is bad or not good enough to get favorable terms. It’s challenging to get a mortgage with bad credit but it’s not impossible. In Canada, a good credit score is a determinant to getting loans with good terms. However, if your credit isn’t where you would have loved it to be, there are still some options you can consider. It is not advisable you go down this path, it would be better you wait a few years to have good credit. But if you want it now, you don’t have to throw away your dream to get a mortgage. Let’s take a look at how you can get a mortgage with bad credit.

Factors That Lead to Bad Credit

When faced with situations like this, you may be wondering why the people around you have good credit but yours is different. Maybe you never thought you might be getting a mortgage before, but if you’re wondering why your credit score is bad, one or all of the following may be the reason.

Late Payments

If there’s anything that has a major role in hurting your credit, it’s late payment. Each late payment is a red flag for lenders, it indicates they can’t trust you to fulfill your obligations. It’s important you understand the effect of these late payments and take steps to avoid them in the future.

Bankruptcy

If you have filed for bankruptcy before, you should already know the repercussions. Bankruptcy doesn’t smile on your credit score or lenders. It indicates to lenders that you were unable to meet your debt obligations to the extent that legal intervention was required. Bankruptcy can stay on your report for up to 6 years. It could have provided a fresh start for you, but it also has a major impact on your credit score.

High Credit Utilisation

High credit utilisation refers to using a large portion of your available credit. Lenders see high utilisation as a sign of financial strain, which may indicate that you are over-reliant on credit. Keeping your credit utilisation below 30% is seen as responsible credit management.

Frequent Credit Inquiries

Each time you apply for credit, a credit inquiry is made, which can lower your score. If there are many inquiries in a short period, it’s a red flag. This tells lenders that you might be desperately seeking credit or taking on more debt than you can handle. Space out credit applications and only apply when necessary.

Improve Your Credit Score With a Secured Credit Card

Improving your credit score starts with developing a healthy financial habit. You should endeavor to pay your dues on time and avoid things that could hurt your credit (as discussed above).

For those with very poor or no credit history, consider a credit-building strategy like getting a secured credit card. You make a deposit to secure the credit line, and your deposit will serve as your limit. Use this card for small purchases and pay it off in full each month. This will demonstrate to lenders that you are responsible with credit and it can help improve your score.

Options for Mortgages with Bad Credit

High-Interest Mortgages

If you have a bad credit score, it’s not likely that you will get a traditional mortgage option or your option may be limited. However, you may want to consider high-interest mortgages as an alternative. These mortgages are offered by lenders willing to accept higher risk in exchange for higher interest rates. Going for this option can make your dream of owning a home a reality, but you should not jump on this at first sight.  High interest rates mean higher monthly payments and more money paid over the life of the loan.

Subprime Lenders

Subprime lenders typically lend to individuals with poor credit scores. They will often offer mortgages that traditional banks may not, but at higher interest rates and with more strict terms. If you are considering this option, you need to thoroughly understand the terms of the loan, the interest rates, fees, and penalties for late payments. Compare different subprime lenders and go for the one with the most favorable terms.

Government-Backed Loans

In some cases, government-backed loans can be an option for you if you have bad credit. These loans are insured by the government, they have more lenient credit requirements and lower down payments. Programs like the Canada Mortgage and Housing Corporation (CMHC) can be of help. However, you need to be sure you’re eligible as the eligibility criteria and availability can vary.

The Role of a Cosigner

A cosigner on a mortgage is someone who agrees to take responsibility for the loan if you default. Such a person could be a family member or a close friend with a better credit score or a more stable income. Having a cosigner can increase your chances of getting approved for a mortgage, especially if your credit score is low. Lenders view a cosigner as additional security, which can lead to more favorable loan terms.

However, your cosigner must understand the risks involved. If you fail to make mortgage payments, the responsibility falls on the co-signer. This can affect their credit score and financial situation. They could even face legal action if the debt is not repaid. Therefore, this decision should be considered carefully and discussed openly between both parties.

Conclusion 

When you want to make such a major financial decision like getting a mortgage with bad credit, you should seek counsel from a debt expert, to know if you’re financially fit to make this decision.

Meanwhile, if you’re struggling with multiple debts that are choking you and stealing your sleep, you need to speak with one of our debt experts at EmpireOne Credit. Your debt can be reduced by up to 80%, and interest will stop immediately. Call us at (416) 900-2324 to schedule a free consultation with us. Being debt-free feels good!