If you’re in the market to buy a home, you’ve likely had multiple people and sources tell you how important it is to have good credit before you even begin the search. In fact, your credit score is one of the first things you’ll need to know as you begin the journey to buy a home. The higher your credit score, the better mortgage rate options you’ll have available to you. The lower your score, the more difficult it will be to secure a mortgage from a lender who may view you as an irresponsible or unreliable borrower.
That doesn’t mean that you can’t pursue homeownership without a perfect credit score, but it does mean you may have to jump through a few more hoops or look into different lending options as a result.
What Is Considered A Bad Credit Score?
Before you can really begin to explore your options for mortgage rates, you’ll have to know your credit score and have a better understanding of how it impacts your overall home buying experience.
Credit scores in Canada range from 300 (worst) to 900 (best). While the specific categories will vary by lender, any score above 660 is typically considered good, while scores between 560 – 659 are considered fair and anything below 560 is deemed poor. Most banks in Canada won’t approve borrowers with a score under 600 and trust companies will require a score of at least 550. If you fall below that 550 mark, you may be able to obtain a high-risk bad credit mortgage from a private lender. Check with your financial institution or bank in advance to get a better idea of their credit score requirements for mortgages so you know where you need to be to qualify for a loan through them directly.
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:
1. Your debt-to-income ratio is important. Try not to use more than 30% of your allotted credit limit on your credit cards. This gives the impression that you’re a responsible borrower and spender.
2. Don’t apply for too many sources of credit as this comes across as a red flag to lenders that you may need access to cash fast which translates to an unstable borrower.
3. The length of your credit history plays a very important role when it comes to your credit score. Cancelling old cards removes them from your credit history and shortens your credit history, which is never a good thing. Always keep your oldest account open if you can, even if you never use it.
4. Focus on crushing your credit card debt and always pay your bills on time (cell phone bills, utilities, credit cards, utilities, etc.). If you’re concerned about being able to pay, don’t ignore the bill as that will escalate things and further harm your credit score. Instead, speak to your provider to discuss a payment plan.
How To Check Your Credit Score
The higher your credit score, the less risk you are to a lender so as a result, you’ll get access to lower interest rates which can save you thousands of dollars over the lifespan of your loan. While you may know the importance of a credit score, you may not know exactly how to get access to yours or monitor it regularly.
When it comes to obtaining your credit score, you have a few different options:
– You can go directly to the source at Equifax, Experian or TransUnion to pay for your credit report which will include a detailed account of your credit history.
– If you don’t want to pay, you can also access your credit score using free tools online like RateHub or Borrowell.
It’s important to note that the credit report you see, versus what your lender will see, may vary. While the differences are often very minor, every credit agency uses different calculations to determine your score, so sometimes there are agencies that aren’t available to consumers which can account for small differences in numbers.
Once you know what your credit score is and what category you fall under for lenders, you’ll have a better idea of how to move forward when it comes to pursuing a mortgage and buying a home.
Is Getting A Bad Credit Mortgage Worth It?
If you don’t meet the bank’s threshold for the minimum credit score for mortgage approvals, you’ll have to look for a “B lender” or “subprime lender” instead. These lenders work exclusively with people who don’t have ideal credit scores. If you’re working with a broker, they can likely put you in touch with a lender who may be best suited to help. Although mortgage brokers are usually paid a finder’s fee by the lender, that’s not always the case for bad credit mortgages so be sure to check with your broker in advance to see if any additional fees will apply should you choose to pursue a bad credit mortgage with their help.
Aside from the finder’s fee, working with a B lender will mean you’ll be paying some other fees you wouldn’t normally with an A lender. These include a loan processing fee (up to 1% of the total loan amount) and an additional 1% if you work with a lender found through a poor credit mortgage broker. While 2% doesn’t seem like a big number, it adds up fast. If you’re applying for a $500,000 mortgage, that 2% amounts to $10,000!
It’s also important to understand that if you have a bad credit mortgage with a private lender and you default on your payments, the lender can sell your home to recoup the cost of what they’re owed.
While you’ll likely have better luck finding a lower interest rate with a mortgage broker than you would on your own, it’ll still be much higher than any rate you’d get with a good credit score. To understand how this option might compare to taking the time to improve your credit score, speak with your broker about comparing how much money you’d be charged in interest at the rate they can give you now, versus how much you’d be charged in interest at a rate you might get if you improved your credit score first.
Getting a mortgage with bad credit usually comes with much higher interest rates, often require larger down payments of 20% or more and come with the risk of repossession should you default on your payments. If you want to apply for a mortgage with bad credit, improving your credit score is the best place to start.