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For many years it wasn’t possible to get a mortgage with bad credit, but that’s changed. Mainstream lenders no longer dominate the mortgage market and even people with bad credit can now find mortgages to buy a home.
The big banks may turn you down when you apply for a mortgage for many reasons. Perhaps you do not have a big down payment. Maybe the lender doesn’t like your employment history even though you’re working steadily now. You may not have a long credit history or you’re self-employed. Any, or all, of these factors may mean you need to seek alternative mortgage funding.
Regardless of the reason, many creditors do not qualify through banks. Here are a few ways you can improve your chances of securing a mortgage so you can buy a home.
Review Your Credit Report
Many lenders deny applicants credit due to errors on their credit report. A 2005 national survey found 18% of people discovered inaccuracies.
Consumers can get a free copy of their credit report from the two credit reporting agencies in Canada; Equifax and Transunion. You should order both to check for errors and act to correct them. You can also add comments to your credit file to explain negative credit events.
Rebuild Your Credit
Before you apply for a mortgage, rebuild your credit to re-establish lender trust. You can do this by taking out a personal loan and repaying it as agreed. Installment loans carry more weight than credit cards on your credit file and lenders take them more seriously.
Try to rebuild your credit score to at least 650 if you want to borrow from a traditional lender. Otherwise, you’ll need to use an alternative lender.
Save for a Larger Down Payment
Money talks, so when you have a large down payment more lenders will consider you. A large down payment also lowers your monthly payments so it’s easier to qualify for a mortgage.
Just because you can get a mortgage with a low down payment doesn’t mean you should. Always consider how much debt you feel you can afford, not what lenders offer you.
Pay Off Debts
If you have many debts, consider a consolidation loan and pay them off. This improves your credit score and increases the amount you can borrow. When lenders see that you can manage credit wisely, they’re more likely to grant you a large loan like a mortgage.
With overwhelming debt, you may want to consider a consumer proposal or bankruptcy. These impact your credit negatively, but they also start you on the path towards rebuilding your credit.
Try Alternative Lenders
Alternative lenders have less stringent qualifications than mainstream banks. If your finances suffered in the past, but you’re back on your feet these lenders may suit your needs.
Alternative or sub-prime lenders often loan to people who do not want to wait until they restore their credit. You can access these lenders online or through a mortgage broker. They offer competitive rates, but you’ll probably pay more than through a mainstream lender. This is because lenders establish interest rates based on risk. If you have bad credit, you’re higher risk.
Nonetheless, you’ll have many products to choose from and initially you can choose a mortgage with a short term. When the term expires, you may qualify for a mortgage through a conventional lender at a lower interest rate.
Seek Expert Advice
Most alternative lenders and brokers offer free pre-approval which involves a thorough credit review and targeted advice. They’re industry experts with access to many lenders and investors with a wide variety of products. They can calculate what you can afford and suggest ways to improve your credit.
Even if you do not qualify with one lender, you may with another. Expert advice ensures you build a solid credit history and buy within your means. It also increases your odds of obtaining a mortgage and buying a home, even if you have bad credit.
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