For many of us, buying a home is one goal we strive for more than any other. It’s no easy task at the best of times, but if you find yourself with bad credit, it may seem as if buying your own house is utterly unfeasible.
Anyone can end up with bad credit. It only takes an unexpected medical emergency or unprecedented leave from work and the debt soon piles up. Missed payments and even bankruptcy can become black marks on your credit report, marks that may haunt you even after you’ve regained your financial feet.
However, there is hope and there are ways to get approved for a mortgage even with a low credit score. Let’s take a look at 4 steps you can take to buying a home, even with bad credit.
Explore Your Credit Report
Most of us don’t really check our credit report until we need it, i.e. when applying for a mortgage. It’s good practice, however, to keep on top of it as mistakes can happen and innocent errors can drastically reduce your score. If you’re considering buying property, be sure you know your score and examine your report before applying for a loan.
Traditionally, you had to pay Equifax or TransUnion for a report on your score, but nowadays you can also use online services to check your credit report for free. If you notice any mistakes, contact the relevant bureau and have them removed as soon as possible. Your low credit score may not be the result of a mistake, but it’s worth checking regardless. Once you know why your score is so low, you can begin to improve it.
Start Improving Your Credit Score
Before house hunting, it’s a good idea to raise your credit score as much as you can. Sometimes it’s better to wait a year before trying to buy a house, though you can often improve your credit score within a month or two. Your priority should be to pay off your credit cards.
Sacrifice unnecessary indulgences for a few months and focus on clearing as much debt as possible. Avoid late payments and remove any collection accounts you may have entirely, and within a few months you should see your score rising. In the meantime, collect evidence of a regular salary and financial stability.
Weigh Up Your Bad Credit Options
With your credit score as high as you can get it, it’s time to start weighing up the options open to you, of which there are several. If your credit score is in the 600-700 range, you already know you don’t have much reason to worry, as you should be able to get a mortgage loan from an ‘A’ lender. If, however, your credit score is below 600, you’ll need to avoid most of Canada’s big banks and instead opt for a ‘B’ lender or ‘subprime’ lender; these are the financial institutions that work almost exclusively with people whose credit is less than ideal.
Alternatively, you may apply for a regular loan, but provide a larger down payment than is typical. This presents less of a risk to the lender and proves you are committed as a buyer. Another advantage of saving for a larger down payment is that it may give you more leverage while negotiating your mortgage rate, as you will be perceived as less risky.
You may also consider a co-signer or private mortgage, whereby friends or family can help you out. This is as much a risk for you as it is for them, as you’re reliant on each other to pay the mortgage on time and in full.
Prepare, Pre-Approve and Plan Ahead
It pays to have a good credit score, as the lender will always see bad credit as a risk. To protect themselves, they will generally enforce higher interest rates or will ask for a significantly larger down payment. Be prepared for this, but also be aware that you’re not destined to be stuck with these rates forever.
Whatever you decide to do in connection with your bad credit, it’s well worth getting a pre-approved loan before starting your house hunting. It’s essential that you know your real budget in order to avoid disappointment and prevent slipping further into debt. If you cannot get pre-approved, you may need to spend longer improving your credit score.
Bad credit often occurs as a result of unfortunate circumstances. Lenders know this and do show a level of flexibility if you’re able to prove that your financial situation has improved. Do all you can to become debt free and pump your credit score as high as you can before you start house hunting. You may find that even without a perfect credit score, you can still find the home of your dreams.