Trying to get a mortgage with bad credit

If you’ve had problems with your credit history, it might be difficult to get a mortgage with bad credit – but isn’t impossible.  That said, there are usually additional criteria to meet as well as additional costs. If you’ve got bad credit and are seeking a mortgage, you need to take time to prepare a detailed plan.

“The road to homeownership is a long one for all prospective first time buyers because of the need to accumulate savings and pay down debt. For those with bad credit, the road can be even longer because of the need to plan ahead even more to manage costs and in some cases demonstrate responsible credit use over a period of time,”  says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.

Start by checking your credit

You need to know exactly what state your credit is in so that you can plan accordingly. Your credit score will ultimately dictate what your options are. In Canada “good credit” means that you have a credit score of 600 or above. If you score below 600, typically it will be challenging to follow the traditional route for mortgage lending (i.e. big banks and lenders).

If your credit score is low

If your mortgage application has been rejected by the big banks because of bad credit history and low credit score, you do have other options, but realize that they are going to cost you even more. Simply put, the greater the perceived risk that a lending institution takes on with a borrower, the higher the interest rate. As a borrower with bad credit, you will likely be looking at working with trust companies or subprime lenders, where you can expect to pay a higher interest rate (sometimes significantly higher than posted rates with banks).

“Even if your focus is on getting a home, ensure that the additional costs that you’ll carry because of bad credit are in the best interest of your financial health. A higher interest rate means that you’re going to pay a lot more out in interest over the length of your mortgage. Is it worth it?,” says Schwartz.

Some people with bad credit also turn to private or alternative lenders, where interest rates and fees are substantial and may result in less flexibility with your mortgage terms and conditions-something to consider as well.

Extra cash on hand

Do you have lots of cash savings accumulated? If you are working with private lenders, alternative lenders or some trust companies, you may be looking at paying out extra fees. You may also be required to put out a larger down payment. Again, if you are perceived as a high risk these factors and extra fees help to mitigate that risk from the lender’s point of view.

All in all, getting a mortgage with bad credit can be an expensive proposition.

What are the alternatives?

While homeownership is a great way to build up your wealth, do the extra costs of getting a mortgage with bad credit make sense financially? You might be better off to continue to rent and amassing your wealth in other ways, like other investments.

You could defer your plans for homeownership, putting space and time between your bad credit history and your current financial situation. It can take years to repair credit history and rebuild your credit score, but from a cost point of view, it often makes the most financial sense. Deferring home ownership also gives you more time to save up for a bigger down payment, which will reduce your debt load when you do become a homeowner.


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