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Qualifying for a Mortgage when you have bad credit NEED TO KNOWS…
Your Credit Score
Your credit score is an important indicator of your creditworthiness. The higher
your score the better chance you have at getting credit extended you. While many
lenders use bureau scores to help them make lending decisions, they also take
other aspects into consideration. Lenders will use your credit score to
determine if you are likely to pay your bills
and also help them place you with the appropriate repayment plan. For example if
you have claimed bankruptcy in the past they might place you at a significantly
higher interest rate.
Credit Reports are provided by either Equifax or TransUnion. The report will
include a beacon or Fisco “score”. That score is important. Ideally you want a
score of 680 or more – this is what you would need for certain programs,
including $0 Down, Credit Lines, etc. (If your self employed or straight
commission you need a minimum score of 700). If you’re below 600, some banks
won’t lend to you. You would need to go to an Alternate Lender – who’ll charge a
higher rate of interest. Also insurance companies are starting to use your score
to decide how much to charge for house insurance. (how much to gouge you if your
score is low!).
The worse your credit score the higher the interest rate you’ll pay!
The worse your credit score the larger down payment you need!
Equifax
Transunion
How do they come up with a credit score? It’s all +’s and – ‘s. Everything you
do, or don’t do - will either be a stroke for you, or against you. Those +’s &
-‘s are applied to 5 different categories. Payment History (35%), Amount Owed
(30%), Length of Credit History (15%), New Credit (10%), Types of Credit in Use
(10%). The computer does it, and it’s very sophisticated.
Bad Credit, Slow Credit or Bankruptcy
Getting a mortgage with previous credit issues is tough, Canada's major banks
shy away from offering credit to clients due to risk. Most times the client has
exhausted all their lending options and are forced to seek financing elsewhere.
There are other alternatives. Even if you have been turned down by the bank a
mortgage broker would be happy to take your application. Mortgage Brokers have
access to over 50 of Canada’s top lenders, including private lenders as well as
non-conforming mortgage programs to help if you have bad
credit, a prior
bankruptcy or other difficult situation… As long as you are discharged and have
at least 2 years
of re-established credit, you are ok.
How a Mortgage Broker can help…
Mortgage Brokers have access to numerous lending institutions and investors.
They will make sure to get the best loan possible: the best interest rate,
conditions, and prepayment privileges. You won't have to deal with any financial
institution yourself. Brokers deal with the same lenders you're used to dealing
with. Including the 'Big Banks' and Trust Companies. They deal in great volume
of mortgages and pass on the savings to you. They also deal with some innovative
broker-only lenders who can offer even more attractive rates and features.
Build / Rebuild Your Credit FAST!!!
1. Apply for a secured Credit Card (Both Parties) shared or joint credit should
be avoided, separate accounts should be applied for. (Home Trust Secured VISA)
is recommended.
2. You need min. three active “trade lines”. i.e. credit card, Loans and one
large loan (car or RSP)
3. Don’t max out your cards – keep your utilization below 75% - this is very
important – 50% max is even better. If you’re over 75% now, you can pay off some
of your debt, or the quick way of fixing it is to increase your maximum limit –
or both.
4. Make your monthly payments on time – put the minimum amount on auto payment.
If you want to pay extra, you can do that any time during the month at your
leisure.
5. Paying off your cards each month is a BAD idea! Always leave a few dollars
owing. If you don’t, there’ll be no balance showing on the report – the accounts
will look “inactive”.
6. If you don’t qualify for a credit a card, you can always get a secured card
by putting a deposit. Try CitiFinancial ($200), Capital One ($200), Home Trust
($1,000). Most lenders want to see a minimum limit of $1,500. Don’t keep going
back to the same bank applying over and over – it’s pointless! And waiting a
couple of months won’t help either if that’s what they tell you.
7. Large Loan. Once you’ve got a bit of credit re-established, you’ll need to
get a large loan (10k or more). Deposit it in a separate account, with monthly
loan payments on auto. You’ll have to top up that account as the end of the loan
nears to cover interest costs. Yes, it’s going to cost you a bit of money, but
it’s a necessary evil. If you don’t, you’ll be paying higher interest on your
mortgage, and insurance, costing you a lot more, or worse, you won’t qualify for
a mortgage at all !!
8. An unsecured line of credit is really no different from a credit card, except
it’s usually got a much higher limit and lower interest rate. You’ll apply for
this once your credit score is over 680.
9. When applying for credit, always try for as much as possible. If you want to
increase your limit do it when you owe very little. Don’t wait until you’re
maxed out (which you’ve now learned not to do anyway – right?!!).
10. Joint Cards do nothing for the secondary cardholder. You must have your own
card(s)!! Joint loans (which are not the same as credit cards) help both
parties.
11. Short money for bills? If you are paying utilities where you live now –
short them some money first, it doesn’t show on your bureau (unless you outright
default / refuse to pay). Next on the list would be rent. Loans & cards last.
Get an Overdraft as soon as you qualify – this will save a lot of problems.
Creditor Disputes
If you get into a dispute with a creditor, don’t simply refuse to pay it and
think that’s the end of it – IT’S NOT!!!! You will apply for a loan one day only
to find they stuck it on your bureau. It happens all the time. Pay the bill.
Write “Paid in Protest” on the cheque. Then take it to small claims court to get
your money back. It costs $150 total to file in small claims which you will ask
to get back if you win. It’s not hard. Keep all your notes, receipts etc. If you
loose, you’ve already paid the bill. Either way you’ve avoided bad credit.
Refrain from pulling your bureau unnecessarily. Again – it’s all pluses and
minuses. Pulling your bureau is a minus. You can pull it a few times a year
without it hurting you, but pulling it too often can hurt your score. This is
one of the benefits of using a mortgage broker. They pull it once, and shop it
as often as I need to without it affecting your score.
NOTE: Mortgages, past or present, do NOT show on your bureau, and do NOT help
your credit. If you default on a mortgage though – that will show up – good luck
getting a mortgage then!
Large Loan / Saving a Down Payment
For your large loan, you may wish to borrow for RRSP’s. This kills two birds
with one stone, saves for your down payment and builds your credit at the same
time. Better still, you’ll get half the loan back in reduced
* Former Bankrupts. If you were just discharged and haven’t rebuilt your credit
yet, you’ll need 25% down. The longer it’s been and the more credit building
you’ve done the less you’ll need down. If it’s been 2yrs and you’ve completely
rebuilt as per the instructions above, all programs will be available to you.
* New Immigrants need one full year of credit /employment to access $0 down
payment, otherwise they need 5% – 25% down depending on exact circumstance
Good Luck and remember A good credit rating isn’t something that will happen on
its’ own, it’s something you must actively pursue.
No Charge Credit Advice!
If you have any questions about your credit please give me a call at 1-877-590-1961 or fill out my feedback form here.
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