The Trick To Getting A Mortgage With Bad Credit

Getting a mortgage with bad credit is possible. Depending on your situation, you could get financing from:

• Major Banks,
• Mortgage Specialist Banks,
• or a Private Lender.

They all want new business and this article will explain what each lender needs to make the deal work.

First, you need to confirm that you have bad credit, you’d be surprised how quickly a credit score can change.

The two major credit agencies in Canada are Equifax and TransUnion. The key factors they use to score you are:

• Your payment history
• Your used credit vs. your available credit
• The length of your credit history
• Public records
• Number of inquiries into your credit file

Keep in mind, if you never borrow money then they have no information on which to score you. You need to use loans and credit cards to improve your credit score. Credit Scores range between zero and 900. Anything below 600 is generally considered bad. Anything above 700 is considered really good.

Major Banks

Major banks sometimes lower costs for home financing but if you’ve got bad credit, most banks won’t give you a mortgage. They will reconsider this if you have a co-borrower with good credit and income. As well, they may make an exception if you have a good explanation for your bad credit and can show that your score has been steadily improving over the past year. Some people have bad credit because they were the victims of fraud or because of a past relationship that has since ended. These are good explanations for events that cause bad credit in the past that is unlikely to be repeated.

Mortgage Specialist Bank

Mortgage Specialist Banks, sometimes called Monoline Banks, are focused on mortgages as their primary business. They don’t have branches but instead sell their mortgages through mortgage brokers. They have standard mortgages that compete head-to-head with Major Banks and in many cases are more competitive, but they also have what is called “Alternate Mortgages” or “Alt Mortgages”.  Alt mortgages are available to people with credit scores below 600 at rates 1% to 3% above standard mortgage rates. These are a great option for getting into the housing market when a great property comes along, but the timing isn’t working for you from a creditworthiness standpoint. You can always switch to Standard Mortgages in a year or two.

Private Lenders

Private Lenders are the most flexible. With private lenders, you are dealing with business people and not bank employees. Banks are constrained by many rules and guidelines, they have several levels of review and approval, and they have to get an approval for any exception or modification to an approved offer. Private lenders don’t have 2 kg manuals but instead, they look at the business case. If the deal makes good business sense, they’ll do it.

That doesn’t mean they’ll do anything. They will still want you to have some skin in the game so don’t expect them to loan you 100% of the purchase price of a home!

As well, private lenders tend to be more comfortable lending in major urban centers because properties hold their values better in more active markets.

From a borrower’s perspective, here are some typical scenarios when using a private lender makes sense:

• You bought a condo pre-sale and now that it is time to take possession you find you don’t qualify for a mortgage under the new stress tests. You plan to complete the sale and sell the condo within a year.
• You have some urgent major repairs to do on your home but are between jobs. You know that once you find a new job, you can refinance the mortgage at a more reasonable rate.
• You have an opportunity to buy the perfect home but the buyer wants to be paid within a week. You know that a regular lender may not be able to get an approval, appraisal, and other due diligence completed in time so you turn to a private lender.

Conclusion

You may have hit a rough patch but that doesn’t mean you’re out of the game. If the perfect property comes along you have options. Generally, mortgage sandbox recommends Mortgage Brokers because they can take you financing to any of the three types of lenders above to find you the best deal. If you approach the lenders directly they’ll offer you the best deal from their options, but that may not be the best deal in the market.

Mortgage Sandbox can save you a lot of time and stress in finding the right professionals with our upcoming MatchFinder platform. MatchFinder pre-screens mortgage brokers and agents and matches you with professionals that fulfill your needs and are aligned with your values. All you have to do is answer a short survey and tell us a little bit about yourself. The platform is currently being tested, please reach out if you'd like to be involved in the development process.