You’re ready to buy a home. You’ve saved up a good solid chunk as your down payment, you’ve zeroed in on the neighbourhoods you’d like to live in, and you know you’ll be able to make your monthly payments. The only problem? You have a terrible credit score. Enter the bad credit mortgage.
Whether it’s due to a previous bankruptcy, missed credit card payments, illness, job loss, or even simply not having used enough credit to have an established score, having a low credit score used to be a huge red flag stopping Canadians from being able to buy their own homes. Luckily for many aspiring home buyers, that’s since changed.
Long popular in the United States, the bad credit mortgage (known as a subprime mortgage) is a relatively recent addition to the Canadian housing market. Simply put, a subprime borrower is any applicant with a low and less than ideal credit score. Loan conditions are typically much harsher on the borrower than those associated with a prime borrower (a considerably higher interest rate is often the primary culprit) but it opens up the housing market to everyone.
It’s important to keep in mind that not all subprime borrowers have a bad credit score; in fact, a fair amount of so called bad credit mortgage borrowers have no credit history to speak of (new immigrants, recent graduates etc). In cases like these, it’s often better to hold off on trying to buy a house until you’re able to establish a credit history. That way when you do apply, you’ll be far more likely to get a loan you’re happy with through a major bank. Some good ways to do this are to take out a secured credit card and to always make your payments in full and on time.
Don’t Give Up on Mainstream Lenders
If you don’t have time to build (or repair) your credit score, there are still things you can do to make your situation as favourable as possible. It’s worth applying for a mortgage loan with the big banks (even if you think you’ll be rejected) because if you do end up qualifying, you’ll get better terms as the bank will want to keep you on as a customer long term (and encourage you to open multiple accounts with them).
Keep in mind that mainstream lenders will likely reject you on the spot if it’s been less than two years since you’ve been discharged from a bankruptcy or completed a consumer proposal. You also absolutely must have stable employment (that you’re able to prove).
If the big banks reject you, then you have to find a subprime lender (also known as an alternative mortgage lender). Shop around and do your research until you find terms and an interest rate you’re comfortable with. It’s also important to note that some lenders are more likely to agree to lend you money if they’re sympathetic to the situation that caused your credit score to drop (for instance, the difference between having gone bankrupt due to do illness or death in the family versus someone who racked up a bunch of debt on unnecessary purchases they couldn’t actually afford).
Important Points to Note
Whatever financial institution you go with will want to make sure you can make your monthly payments, that your debt-to-income ratio falls within a certain category, and that the property you’re interested in buying is actually affordable to you. They price mortgages based on risk, so be prepared to pay more if you’re income is unstable, the property is expensive, or the story behind your low credit is less than ideal.
In addition to paying a higher interest rate, you may have to pay more upfront with a bad credit mortgage.
If you’ve recently been through a bankruptcy, you might also be required to put down a deposit of at least 25% (which ultimately benefits you in the long run as you’ll have a solid quarter of the property paid off already and won’t have to pay for Mortgage Loan insurance [which you have to pay for any down payment under 20%]).