If you have bad credit, it doesn’t necessarily mean that you can’t get a mortgage.
When deciding on whether or not to lend to someone, lenders try to assess your ability to repay. A Calgarymortgages is just one input they consider. They also look at things like the reason for the low credit score, job history, income stability, and your overall debt level.
What is Considered a Poor Credit Score?
The standard measure of credit scoring used by the credit bureaus and lenders is the FICO Score, created by Fair Isaac Corporation. In their rankings, any score under 580 is considered poor.
If your score is in the lower end of the scale above, the first thing you should do is closely review your credit report.
Credit reports are known to have mistakes. You can call the credit bureau and dispute things like inaccuracies, incomplete or outdated data, incorrect payment statuses, and credit records that aren’t yours. If you find a mistake, address it right away. It may take time to resolve, and a lender typically won’t let you close on a mortgage if there is a dispute on your credit score.
If your score is below 500, you are going to have a tough time finding a lender. It would probably be best to work on repairing your credit before you buy a house.
How A Low Credit Score Affects Your Mortgage
As mentioned, the lender is looking at your ability to repay. A low credit score might mean adjustments to the other elements that a lender typically considers.
Larger Down Payment. – You might be asked for a higher down payment. This gives the lender a bigger equity cushion and less money for you to pay back. The bigger equity cushion ensures that you are likely to do everything possible to make your payments rather than risk the money invested in your house.
Higher interest rate. – Interest rates compensate lenders for the risk they are taking. A lower credit score reflects a higher risk level, and lenders will want to be compensated for this higher risk.
Higher closing costs. – The lower your credit score, the fewer lenders you will have to choose from. This makes it hard to shop for lower closing costs like origination or lender fees. Also, if you are planning on staying in your home for a long time, it might be beneficial to buy down those higher interest rates by paying points at closing.
Higher Mortgage Insurance Rates. – If you don’t have a score above 620, your mortgage might have to be backed by a government institution. These institutions guarantee your mortgage payment to the lender and, in return, charge borrowers who enter their loan programs up-front fees, which are paid at closing, and monthly mortgage insurance fees.
Lender May Adjust Other Criteria – They may adjust other factors they use when approving a mortgage to compensate for the lower credit score. For example, they may lower the debt-to-income ratio allowed or minimum income levels.
How Do I Get a Mortgage with a Low Credit Score?
You can take several steps to help your chances of getting a mortgage with a low credit score:
Larger Down Payment – Don’t wait for a lender to ask for a larger down payment. Be prepared to offer one. This will give the lender confidence in you as a borrower and reduce their risk level.
Low Debt Levels – Even though your credit isn’t good, that doesn’t mean you have a lot of debt. Try to reduce overall debt levels like car payments, student loans, credit cards, and other recurring debt.
Make Sure You Have No Debt in Collections – If others are already having problems collecting from you a lender is going to be less likely to want to put themselves in a similar situation.
Co-Signer – You can get someone to co-sign a mortgage for you. Realize that you will be asking a lot of this person. If you don’t pay the mortgage, they will be responsible, and their credit will be impacted. In fact, their credit is likely to be impacted by the fact that they have taken on such an obligation, making it harder for them to borrow for other needs.
Only Use One Partner to Apply – the second partner can transfer assets to this partner. This way, one partner’s bad credit isn’t an issue. Be careful with this, though. The partner that applies for the mortgage will have their name on the deed and be the sole legal owner of the house. For married couples, this isn’t usually an issue. Non-married couples might want to have an attorney draft another agreement that details what happens if there is a separation.