There are options available!
It has been a long-held dream by many Canadians. A dream that is built around the pride that comes from owning your own home. A milestone that helps shape our lives and forms the building blocks as we raise our families and progress in our careers.
Since the economic woes in 2008, the dream has become a little more difficult to obtain with the tightening of restrictions surrounding mortgage approval by the traditional lenders including the big banks. The mortgage stress test has been harder to pass and has left many feeling that their goal of owning their own home has become an impossible dream.
What if you have bad credit? Is it time to permanently put this dream on hold?
It is not an impossible feat. In Ontario, it is still very possible to meet the criteria for mortgage approval, despite bad credit and ever-tightening mortgage restrictions, and see the goal of homeownership come to fruition. There is still a clear path to homeownership.
The answer? The mortgage criteria will be assessed differently than what traditional lenders are basing their loan applications on. Although a big bank, which is classified as an A lender, may deem your application to be a high-risk loan, there are other lending options.
You will have to look to other sources that are now widely available in 2021 to make your mortgage goals a reality, namely established trust companies, and private loan lenders. These lenders are classified as C lenders or subprime lenders and are based in this Province to help bridge the mortgage gaps left open by the big banks and traditional lenders.
What Constitutes bad credit and your credit score?
So you may be asking yourself is my credit too poor? What are the lenders considering to be bad credit?
In order to answer your credit questions, it is important to have a clear understanding of how credit comes to play in the mortgage approval process and how an individual’s credit score
affects the loan process.
There are two major credit reporting agencies in this country, Equifax and Transunion. Regardless of which reporting agency we are referring to, their primary role is to assign a credit score to an individual based on a number of defined criteria. These criteria can be summarized as:
1. Payment History- do you pay your bills on time?
2. Utilization- how much do use your credit cards and how much do you maximize your revolving credit
3. Length Of Credit History- how long have you had access to credit or are your accounts open
4. Types of Credit Products- which represents the number and types of accounts held
Your credit report paints a picture of your overall creditworthiness based mainly on the above criteria. From these criteria, your credit score is determined and allocated. Keep in mind that a credit report is essentially a snapshot of your credit performance at any given time and there are ways to improve your credit score moving forward.
If you have been consistently late on bill payments or have been late or missed credit card payments, for example, this will significantly affect your credit score and will be recorded in your overall credit report.
When Prime lenders or A lenders are assessing mortgage loan applications, your credit score and credit report will play significantly into their overall decision as to whether to approve you or not.
Fico scores or credit scores range from 300 to 900 with 300 hundred considered very poor and 900 to be outstanding. Prime lenders will be demanding a score of over 650 to qualify for a mortgage. However, B lenders, such as trust companies will accept a credit score of approximately 650 to qualify. Private lenders will accept a credit score of 500 by assessing other criteria and charging an overall higher interest rate on the final negotiated mortgage loan.
Private lenders are your best route on the road to homeownership with poor credit versus the big banks Although is it important to take the necessary steps to improve your overall credit score by paying bills on time, paying off your credit card in full if you can, and showing overall creditworthiness, you can opt to apply for a mortgage with a Private lender or Trust company.
These subprime lenders will look at other assets you may own, your salary, and the value of your property if you are applying for a second mortgage. In the case of a second mortgage, a private lender will calculate the Loan to Value (LTV) on the existing property and will not lend out more than 80 percent of the value of the house, (or 80 percent LTV).
In comparison, a big bank can lend up to 95 percent LTV based on excellent credit. Private lenders will also expect a larger down payment of around 20 to 25 percent to offset poor credit scores. When considering private lending options, Interest rates will ultimately be higher than those charged by the big banks, as this is still deemed a higher risk loan. The mortgage terms may vary as well and could be shorter in length with options to negotiate terms.
Overall, private lenders still represent an excellent alternative for borrowers with poor credit. By looking at other factors, Private lenders will be able to negotiate mortgage loans with terms that suit your needs and provide an opening to homeownership that the major banks may have closed the door to.
The big banks may be able to offer lower interest rates on your mortgage loans but they are able to offer these lower interest rates based on higher credit scores that make that loan a lower risk loan for the bank.
To bridge the gap and overcome the hurdle of poor credit there still remains established private lending options and trust companies that will be able to negotiate mortgage terms that work best for your needs. This will put you in the driver’s seat on the road to owning your own home.
Written by Jonathan Alphonso - firstname.lastname@example.org - Mortgage Broker Store