If you’ve got bad credit because of a bankruptcy, a consumer proposal or other credit problems, it can be challenging to buy a home.
“Buying a home with bad credit is possible, but if you are a prospective buyer in this situation, you’ve got to be realistic about dealing with the challenges that will inevitably lie in your path towards home ownership,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
“The reality is that you’ll likely be subject to higher mortgage rates when buying a home with bad credit. That means that homeownership will cost you more. Because of this, it is even more important to create more wiggle room in your household budget, so you’re not as vulnerable financially,” says Schwartz.
Here are some suggestions on how to improve your chances of buying a home with bad credit, get lower interest rates and better manage the costs that you’ll face.
Hurry up and wait
If you’ve declared bankruptcy or had a consumer proposal, it will likely be a couple of years at least before lenders will even consider you as a candidate to buy a home. Given the reality of this situation, you need to adjust your timeline and your expectations for the house hunt.
The good news is if you postpone your home purchase, you’ll have more time to build good credit history which can boost your credit score and make you eligible for better mortgage rates. You also have more time to save money for a down payment and emergency savings fund; there is more time to develop a working budget and to become financially literate about home ownership. These are all important parts of responsible financial home ownership.
Manage your costs
Plan to use as much as you can as a down payment, so that there is a healthy gap between what you own and what you owe when it comes to your mortgage. That will keep cash flow going and leave you less likely to have to turn to more debt.
Pick the right term
If you are subject to a higher rate because of your bad credit, lock in for a shorter term for your mortgage. During this time period, you can establish your credit more solidly, which may help you to secure a better interest rate when your mortgage comes up for renewal.
Pick the right property
Some properties are considered higher risk by lenders. Select a property to purchase that is likely to sell in the event of foreclosure and you may be able to get a better interest rate. Rural properties or less in-demand properties may make it harder for you to get a better rate.
Commit to good credit
After you’ve been discharged from a consumer proposal or bankruptcy, make very sure that you always make payments on time with your credit products. If you are late, even just once or twice, that is a signal to lenders that you are likely to repeat the mistakes of your credit past.