Every facet of your life uses your credit report, from getting a cell phone plan or utility service to applying for a job or getting insurance.
Home loans are no exception. In order to assess your credit history and your credit score, your mortgage lender will examine your credit score and your credit history. Defaulting on previous loans or not paying on time in the past will be a big red flag for your lenders.
In order to qualify for a mortgage, you must have a good credit score given that mortgage lenders lend out hundreds of thousands of dollars to applicants. A credit report calculates your credit score. Your credit report contains information lenders have provided to Equifax Canada and TransUnion Canada, Canada's two main credit reporting agencies.
In addition to your payment history, your credit report will contain information about your credit limit, your credit history, the type of debt you have, any bankruptcy or past-due collections history, and records of when your credit report has been reviewed by lenders.
There are plenty of factors that will impact your credit score so it’s important to understand what those are and what power you have to change things for the better. Consider these tips if you’re looking to improve your credit score:
Make Sure Your Credit History Is Accurate
It is imperative that anyone considering a traditional mortgage review their credit history before assuming that their credit is too bad.
Credit scores measure how well you have utilized past credit in Canada and range between 300 and 900. Over 80 percent of people have at least one mistake on their credit history that affects their credit score. You should take the time to review your credit report and be prepared to contact any creditors you have already paid. Often, these discrepancies can be resolved very quickly once they are reported.
Choosing the Right Lender
Typically, lenders will not approve your mortgage request if you have a credit score below 600. If your credit score needs to be raised, you can either work hard to raise it, or find a lender who will work with you.
Usually known as "B" lenders or "subprime" lenders, they work almost exclusively with people who have less-than-ideal credit, and they can be of great assistance to you. It may be necessary, however, to work with a private lender if you have filed for bankruptcy or consumer proposal within the past two years. A mortgage broker can recommend a private lender that will best suit your needs if this is the case.
Save More Money by Saving a Larger Down Payment
The down payment is almost certainly going to be larger than normal, regardless of whether you work with a subprime lender or a private lender. A large down payment reduces the lender's risk.
There is a possibility that any bank or lender - including a private one - won't consider your mortgage request unless you've saved as much as 20% to 25% of the total purchase price. One of the benefits of a higher down payment is the ability to negotiate better interest rates.
A Higher Than Normal Rate and Extra Fees Are to Be Expected
Private lenders can charge high-interest rates as they manage to mitigate some of the risks associated with providing large amounts of money to people who have low credit scores. It is a fact that you may be able to refinance your mortgage at a much lower rate if you are diligent in paying your mortgage payments on time and improving your credit score.
Even though bad credit mortgages require a large down payment, fees, and a higher-than-usual interest rate, keep in mind that these rates are not permanent. It is possible to rebuild your credit enough to refinance in the future at a lower rate if you make timely payments on your mortgage while you work to improve your credit.
People with bad credit often think there is no chance of them getting a mortgage to purchase their own homes. Luckily, this is not true. Even if you have damaged credit because of bankruptcy or delinquencies, there are several ways to obtain a mortgage.
- It is important to know how much debt you have to your income. Keep your credit card usage below 30% of your credit limit at all times. Having this reputation gives the impression that you are a responsible borrower and spender.
- If you apply for too many different types of credit, lenders will consider you to be an unstable borrower, as you might need fast cash.
- It is important that you have a long credit history if you want to improve your credit score. Getting rid of old credit cards reduces your credit history and shortens your credit history, both of which are bad. You should always keep your oldest account open in case you need it in the future.
- Pay your credit card debt off as soon as you can and make sure you pay your bills on time (utilities, phones, credit cards, etc.). When in doubt about your ability to pay, do not ignore the bill as that will escalate the situation and further harm your credit score. You should instead discuss a payment plan with your provider.
Having a high credit score decreases your risk to a lender, so you'll be offered lower interest rates, allowing you to save thousands over the loan's life.
You should be aware that the credit report you see will differ from the credit report a lender sees. Even though the differences are often very small, each credit agency calculates a score differently so sometimes there may be credit agencies that consumers don't have access to that can explain small differences in numbers.
You'll be able to make a more informed decision about what to do next when it comes to pursuing a mortgage and buying a home if you know your credit score and what category you fall under.