Bad Credit Home Buying – It Can Be Done

Buying a Home With Bad Credit

If you’re feeling financial pressure from debt, be assured, you are not alone. In the last year, over 100,000 Canadians have declared personal bankruptcy and just as many, even more, will become insolvent in the year ahead.

If, as a result of financial difficulties, your credit rating has been compromised and it looks like that new home purchase is not in the cards for the near future, take heart. All is not lost, not even for the would-be homeowner with bad credit. There are things you can do to make that dream home a reality sooner than you think and despite that bad credit rating.

Fix Your Credit

To start, you can increase your chances of getting that home mortgage by taking steps to fix your credit rating. You’ll need to obtain credit reports from Canada’s two consumer credit reporting agencies, Equifax and Transunion. Any bank or institutional lender doing a credit check may use either one or both of these agencies so it’s in your interest to see both credit reports. Review them for discrepancies and inaccuracies, clean up what you can, and contact your creditors to discuss debt repayment. Your objective is to get your credit score to at least the 650 mark and higher, if possible. Debt consolidation loans, credit counselling, debt management plans – these are all possible solutions to relieving your burden of debt and should be considered. A little online research will tell you what you need to know about these options.

Consumer Proposal & Personal Bankruptcy

Depending on your financial situation, if your debt is truly overwhelming, you may want to consider two additional options: debt negotiation and personal bankruptcy. It is sometimes possible to negotiate a debt settlement agreement by hiring a Licensed Insolvency Trustee (LIT) to administer a consumer proposal. A consumer proposal is a legally binding agreement between you and your creditors made on your behalf by the LIT. A consumer proposal may offer to pay a percentage of the debt, usually an amount that is feasible given your financial circumstances at the time of negotiations. Alternately, an extended repayment schedule that enables you to honour the debt over a longer period of time may be negotiated on your behalf.

Be aware that one of the consequences of filing bankruptcy or making a consumer proposal is that, until your discharge, a bank will not approve you for a mortgage loan. An absolute bankruptcy discharge, though it releases the debtor from all personal liability for his/her debts, can take as little as nine months or as much as several years. There are certain types of debt that are non-dischargeable. If you’re considering bankruptcy, consult a Trustee to learn more.

Private Lenders

If repairing your credit is too slow for your liking, you may want to consider taking out a loan from a private lender. A private lender may be more willing than, say, a bank or other institutional lender to consider your loan request despite your bad credit. But understand there will be financial consequences. A private lender will almost certainly require you to pay a larger down payment, as much as 25% of the property’s value as compared with the typical 5% required by prime lenders. In addition, private lenders are not insured so the risk to you and your property is higher. Still, if you can find a private lender you feel you can trust willing to finance your mortgage, and if you can manage the sizeable down payment that may be required, then a private lender may be your ticket to being a homeowner sooner.

Biting the Interest Rate Bullet

Face it, if your credit is bad, you should expect to pay a higher interest rate than you would if your credit was good, at least for a time. Bad credit mortgages typically carry interest rates of 8% and upwards. By comparison, to individuals with good credit histories, some mortgage lenders offer interest rates as low as 2.5% on a five year fixed mortgage. But again, don’t lose heart. If you can manage that high interest rate for a few years, in time you should be able to refinance your loan at a lower interest rate.

Leverage Your Employment History

Employment and history are two key factors that Canadian lenders weigh when assessing your loan application. If you have a long history with one company and a record of steady advancement, salary increases, etc., you can use this to counterbalance any bad credit history. Lenders will appraise your entire credit history along with your current financial situation. A bad credit situation, past or present, that can be explained circumstantially, coupled with an impressive employment record may be a wash with the lender. A lender’s approval may hinge as much on your ability to bear the burden of debt in the present as on any financial difficulties you faced in the past.

The long and short of it is that bad credit needn’t necessarily keep you from buying that house you want. But a home mortgage is a long-term financial commitment so, bad credit or not, you’ll want to think long and hard before making it.