How to get a mortgage if you have bad credit

Sometimes, a difficult past is standing in the way of a bright future. Bad credit can do that to you. After all, credit history is an integral part of the mortgage approval process.

If you’re running into roadblocks or don’t think you can get mortgage financing, don’t give up. It is possible to get a mortgage with bad credit! And it can be a very important step in getting you back on track financially should you need to pay off a significant amount of debt.  

One of the primary advantages of working with a mortgage broker is the access you get to a wide range of lenders, including institutional and private lenders that specialize in bad credit mortgages. While the guidelines are different for each, these lenders look at your overall situation and entire credit history, and some will consider your application even after a consumer proposal or bankruptcy. For certain areas of the country, primarily large metropolitan areas, there are lenders that will lend just based on the equity in a home.

Keep in mind that even though you will have a higher interest rate and may pay additional fees, bad credit mortgages are typically short term i.e. 1 year term. During this time, we can work together to improve your score and then look to move you to a better rate longer-term mortgage.  

If you don’t have an immediate financing need, or your situation is such that you don’t qualify with one of these lenders, there are ways you can make up for bad credit, which include:

1. Increasing your downpayment to 20 per cent or more.
2. Asking a trusted friend or family member to be a co-signer. Your co-signer will need a good credit score and have the capacity to be responsible for the mortgage if you are unable to handle the payments. 
3. Or consider taking the time needed to repair your credit first. A much improved credit situation can save you the cost of a higher interest rate and less favourable terms.

If your past is standing in the way of your future… get in touch today and let’s chart a course to get you where you want to go.

Easy ways to boost your credit score!

1.  A secured credit card will allow you to establish or re-establish a solid credit rating. These cards require a deposit so the cardholder can never be in default.
2. Check your credit report and make sure it is accurate. If there are discrepancies, get in touch with the credit agency.
3. The single biggest factor in your credit score is having a timely bill payment history.  Don’t let a bill get past due, and never let a bill go to collections.
4. Your score is based on your credit balance relative to your available credit. Try not to use more than 30 per cent. If your limit is $10,000, don’t let your balance go higher than $3,000. 

The lowdown on the First-Time Buyer Incentive

The first-time buyer incentive, launching on September 2^nd, is a shared equity program designed to reduce mortgage payments for qualifying first-time buyers who have the minimum 5% downpayment required for an insured mortgage. The Canada Mortgage and Housing Corporation (CMHC) will provide 5% of the cost of an existing home, or 10% of a new home. This incentive isn’t payable until you sell the property and is not charged interest.

There are a few caveats. If your household income is more than $120,000, you aren’t eligible for the program. And your total borrowed amount (including the incentive portion) can’t be more than four times your household income. With a household income of $120,000, the maximum purchase price would be approximately $505,000 with 5% down, and about $565,000 for a 15% downpayment. 

Mortgage Payments - CMHC’s First-Time Buyer Incentive 

                         Assumes 25 yr am, 5 yrs, 2.89%

You are required to pay the incentive back after 25 years or when you sell the home, with the repayment amount based on the property’s fair market value, whether it has increased or decreased in value. If you received a 5% incentive and your $500,000 home increases in value to $600,000, then you are required to repay $30,000. If the value deceases to $450,000, you’ll repay $22,500. You can repay the incentive at any time without penalty

This new incentive program has certainly added another layer of complexity to the already complicated mortgage world. Getting expert advice throughout your mortgage years is more important than ever.

Got a homebuying dream? Feel free to get in touch for a review of your situation at any time! I can certainly run some numbers to determine if this is something you, or someone you know, may want to consider.

Why early payout penalties matter now more than ever.

We are deep in the competitive spring real estate market! And we’re seeing a very interesting rate anomaly. Fixed-rate mortgages are very competitively priced and gaining in popularity, while variable-rate mortgages are looking overpriced. We’re even seeing ten-year mortgages at good rates back in the news. If the market is telling us that fixed-rate mortgages have an advantage, then be sure to look at the fine print because the devil is in the details and early payout penalties matter.

Why? Sometimes you just need to get out of your mortgage! It’s impossible to plan for many of the things that will happen in our lives, like job loss, illness, divorce, relocation, or another personal matter. Or when much better mortgage rates become available. Your needs and the market can shift easily during the term of your mortgage and the last thing you want is a painful penalty to get out early. That’s why it’s important to consider what your early payout penalty may be before you get your mortgage. We all want to believe that none of these scenarios will transpire, but when they do, it’s a relief to have a cost-effective option to get out.

Generally, to break your mortgage, you can expect to pay the greater of either a) three months’ interest, or b) the interest-rate differential (IRD). With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates.  Not all lenders calculate IRD the same way, and the differences can amount to thousands or even tens of thousands of dollars.

Early payout penalties are particularly important to consider if you are looking at a 10-year mortgage. If you break a 10-year mortgage before 5 years, the penalty with most lenders can be substantial. If there is a chance you could break the mortgage in the first 5 years, you may not want to consider a 10-year term.

Don’t let anyone tell you early payout penalties are “all the same”. They’re not. When choosing between mortgages, be sure to compare how the early payout penalty will be calculated. If you ever need to get out of your mortgage early, having the right mortgage could save you stress and big money. Advice on how to avoid painful penalties is part of the service I provide to my clients every single day!

Why early payout penalties matter now more than ever.

We are deep in the competitive spring real estate market! And we’re seeing a very interesting rate anomaly. Fixed-rate mortgages are very competitively priced and gaining in popularity, while variable-rate mortgages are looking overpriced. We’re even seeing ten-year mortgages at good rates back in the news. If the market is telling us that fixed-rate mortgages have an advantage, then be sure to look at the fine print because the devil is in the details and early payout penalties matter.

Why? Sometimes you just need to get out of your mortgage! It’s impossible to plan for many of the things that will happen in our lives, like job loss, illness, divorce, relocation, or another personal matter. Or when much better mortgage rates become available. Your needs and the market can shift easily during the term of your mortgage and the last thing you want is a painful penalty to get out early. That’s why it’s important to consider what your early payout penalty may be before you get your mortgage. We all want to believe that none of these scenarios will transpire, but when they do, it’s a relief to have a cost-effective option to get out.

Generally, to break your mortgage, you can expect to pay the greater of either a) three months’ interest, or b) the interest-rate differential (IRD). With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates.  Not all lenders calculate IRD the same way, and the differences can amount to thousands or even tens of thousands of dollars.

Early payout penalties are particularly important to consider if you are looking at a 10-year mortgage. If you break a 10-year mortgage before 5 years, the penalty with most lenders can be substantial. If there is a chance you could break the mortgage in the first 5 years, you may not want to consider a 10-year term.

Don’t let anyone tell you early payout penalties are “all the same”. They’re not. When choosing between mortgages, be sure to compare how the early payout penalty will be calculated. If you ever need to get out of your mortgage early, having the right mortgage could save you stress and big money. Advice on how to avoid painful penalties is part of the service I provide to my clients every single day!

Good Debt vs Bad Debt

Good debt is manageable debt that can bring you close to your financial goals. It includes a well-structured mortgage, or borrowing to invest when it is designed to improve your overall financial position. Bad debt gets in the way of building long-term wealth, and creates an ongoing burden that ranges from uncomfortable to crippling. It includes credit cards, high-interest loans, and “buy now/pay later” purchases. If you’re borrowing a large amount for any reason, including organizing your current debt, please let me know. You may be able to look to your mortgage for your lowest cost funds.

The lowdown on downpayments

I get questions about downpayment all the time! So here is the lowdown on how much you need, and how you might get it.

How much do you need?

Not surprisingly, most Canadian homebuyers purchase a property with the absolute minimum downpayment. The thing is, the minimum can vary, so you want to be sure you know how it’s calculated.

Will you live in the home? If the house will be owner-occupied, then you need 5% down for the first $500,000 of the purchase price, and 10% for any amount over $500,000 up to $999,999.  If the purchase price is $1,000,000 or more, the minimum down is 20%.

Hoping to skip the cost of mortgage default insurance? Then you’ll need at least 20% down. Any downpayment less than 20% of the purchase price requires this insurance, which will be added to your mortgage principal.

Buying a rental or recreational property? If it’s not going to be your own principal residence, then you’ll need 20% down. Genworth and CMHC have a vacation/second home program that allows you to put 5% down but mortgage default insurance will be required. Rental properties require 20% down.

Are you new to Canada?  If you’re a permanent resident, then you’ll need the same downpayment as a Canadian citizen: 5% for the first $500,000 and 10% after that. If you are a non-permanent resident, then you may need 10% down.  And if you’re not a resident of Canada, then you’ll need at least 35% down from your own resources (not borrowed).

Smart ways to come up with a downpayment

If you’re looking to buy a second home, then your best path to a downpayment is often to refinance your existing home. A review of your situation is the best starting point.

If you’re saving for your first home, here are some ways to come up with the cash:

1. A financial gift. If you’re lucky enough to have financial support from a parent or other blood relative, you’ll need to get a form signed that says the funds are a gift and that you are not required to pay the money back at any time.  
2. Your RRSP:  You can withdraw up to $35,000 tax-free from your RRSP or $70,000 per couple.  The recent federal budget increased this from $25,000 and also announced that in 2020, this program will be available to divorced individuals.  You will be required to pay the funds back over 15 years. 
3. TFSA/Investments: If you withdraw from your TFSA to boost your downpayment, you’re allowed to re-contribute, so you never lose your TFSA room.  If you haven’t set up a TFSA, then do it today and set it up so money goes in every month.
4. Early inheritance: Many parents and grandparents would rather help with the purchase of a home while they’re alive rather than having their children wait for an inheritance.  
5. Sell assets: For instance, a vehicle, or jewelry. You need to show 3 months of bank statements to support your downpayment, and explain any large deposits.
6. Money from outside of Canada: If you’re bringing funds from outside of Canada, you’ll want to have those funds in Canada for at least 30 days before closing, and you’ll need to provide 3 months of financial history from the original account they came from.

Often homebuyers are actually closer than they think to buying that first or next property. Get in touch any time. Early advice can save time, money and stress!