How To Buy A House When You Have Bad Credit
According to recent reports, more than one in eight adult Canadians are expected to declare bankruptcy or negotiate a debt settlement with creditors. And yet, Canada’s homeownership numbers are currently at a record high. This just goes to show you that devastated credit doesn’t have to leave you high and dry when it comes to entering the housing market. Granted, credit-challenged consumers are bound to encounter more than their fair share of bumps along the road to homeownership. Even so, poor credit history isn’t insurmountable. Here’s what you need to know if you’ve recently gone through a bankruptcy or consumer proposal but are still optimistic about buying your first home.
1) Get Stable
Mainstream lenders are being more careful than ever, especially when it comes to working with bad credit borrowers. Currently, most lenders won’t consider entering into an agreement with you for at least two years after you’ve been discharged from bankruptcy or a consumer proposal. This means having stable employment and a fully provable income.
If you’re anxious to enter the market now, your options are limited. But that’s not to say it can’t be done. Private lenders or uninsured lenders may be able to assist you, provided you put down at least 25 percent.
2) Assess The Risk
It’s not secret that lenders price their mortgage rates based on risk. As such, someone who’s in search of a financing deal after insolvency will be forced to pay a premium, alongside increased lender and broker fees. with that being said, most lenders will take your story into consideration when it comes to assessing your situation. For example, lenders tend to have more sympathy for a bankruptcy that was caused by a medical crisis, as opposed to one that was caused by frivolous spending.
3) Re-establish Your Credit
The best way to re-establish your credit before seeking a bad credit mortgage is to have at least two credit accounts, each with a minimum two-year stable record. They type of credit account doesn’t matter; major credit cards, instalment loans, car payments, etc. In most cases you will need a $1,000 to $2,000 credit limit on each account in order for a lender to look at your seriously.
A secured credit card is probably the most popular option for rebuilding your credit. This type of credit card requires a security deposit (it’s best to look for a provider that will give you your deposit back after you prove your creditworthiness). Just make sure you take the time to pick the card that’s right for you. Cancelling a credit card can hurt your credit score even more.
4) Don’t go long
If you’re working with a private or uninsured lender, be sure to listen to your mortgage broker and avoid locking your rate in for as short a term as possible. One- or two-year terms will give you enough time to recover from credit woes and help you avoid paying high interest rates. During this time, your mortgage broker can provide you with advice on how to rebuild your credit and refinance sooner with a conventional lender.
It’s important to note that, just because you can manage to secure a mortgage doesn’t necessarily mean that you should. When possible, focus on rebuilding your credit first. The more money you save , and the higher your credit score, the easier it will be to afford a home purchase. Your goal during credit rehab should be to build your score back to a more respectable number (650 to 680+). This will end up saving you a considerable amount of money in the long run.