After renting for a while, you have decided it’s time to start the next stage of your journey: becoming a first-time home buyer. However, you might be wondering how exactly you can get a mortgage with bad credit.
The good news is that there are a few ways to increase your chances of getting approved for a mortgage.
First though, let’s take a quick look at what mortgage lenders will check for when deciding whether to lend to someone with bad credit, and what exactly is considered bad credit.
Do I Have Bad Credit?
While different organizations might have slightly different scoring tiers, most fall pretty close to these numbers:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
To access decent rates without additional risk-related fees or rate premiums, most lenders require at least a score of 620. The higher your score, the better rates you will be offered.
If your score is lower than 620, you can still get a mortgage. However, you will likely have to access services through a broker who has a portfolio of alternative lenders, until your credit profile is rehabilitated.
For more on what impacts your credit score, check out one of our other blogs.
What Do Mortgage Lenders Look For?
Besides your credit score, mortgage lenders will assess the likelihood that you will pay your debts by looking at a few things:
This includes your current income and employment history.
Having a lot of money in the bank doesn’t necessarily mean you will be approved. Having an unstable employment history won’t inspire confidence in your ability to hold down a job, and therefore make your payments.
A “confirmable” income through the Canada Revenue Agency can also make a difference. For those who are self-employed or have commissioned based work, lenders will calculate a two-year average income before making a decision. Alternative lenders may accept other forms of income verification including matching invoices against bank records.
Your debt-to-income ratio is the amount of your monthly income that is dedicated to paying off your monthly debts.
Simply expressed as a percentage, mortgage lenders typically look for something below 36% of your gross income being used to pay your obligations. Again, alternative lenders may accept higher ratios in exchange for rate premiums or fees. However, for those with bad credit, you should be trying to keep this ratio as low as possible.
Lenders will always appraise the value of the property in question. They do this to make sure the investment is worth making.
How To Increase Your Chances of Approval
So, what can you do to secure a mortgage for the home of your dreams?
Improve Your Credit
The most obvious way to increase your chances is by improving your credit score. You can do this by making a substantial payment to lower your balance. You can also dispute any credit-report mistakes, ask for a higher credit limit in order to get your balance farther from the credit limit, and more.
Most importantly, you will want to exercise your credit usage with good habits of making purchases and making at least the minimum amounts on your trade lines. You don’t need to make large purchases.
Simply use your credit card for normal purchases like gas and groceries (items that you might normally pay for with cash or debit). Then go home and make a payment from your bank account to your credit card.
Make A Larger Down Payment
If you don’t mind waiting a little while longer (this can also give you time to improve your credit score a bit), you can take some time to save up for a bigger down payment. The higher it is, the less risk the lender needs to take.
Get a Cosigner
A cosigner is someone who promises to take responsibility for a mortgage in the event of a default. This person must have a strong credit profile of their own, and they may expect to have their credit worthiness reviewed, as if they were an applicant. This can greatly increase your chances of getting approved.