Buying a house today has become challenging since most conventional mortgage lenders have stricter guidelines including the requirement to have good credit. Therefore, you may wonder if it’s at all possible to buy real estate with poor credit or “bruised” credit.
The good news is people are purchasing a home every day with poor credit history, and therefore, it is possible for you to get into the real estate market, which can also inadvertently set you on a path to improve your credit score in the near future.
There are different mortgage loans available that are accessed only through mortgage brokers that service borrowers with bad credit. The lenders that offer these "bad credit mortgage loans" are called Alternative Lenders.
Alternative lenders, also known as “B” lenders, can consider borrowers with bruised credit while still offering competitive mortgage interest rates within the alternative lending space. Some borrowers think alternative lenders are the same as private lenders that charge very high interest rates, but this is not the case.
Alternative lenders are financial institutions, and most times, they are sister companies of major prime banking financial institutions and just service borrowers with bad credit.
How much a down payment does a purchaser require if they have bad credit?
In Canada, the minimum down payment required is 5% of the first $500,000 purchase price and 10% on the remaining purchase price, not exceeding $1 Million. Purchase transactions that have less than a 20% down payment must be insured through one of the three high-ratio mortgage insurance companies in Canada.
Unfortunately, these insurance companies will only insure mortgage applications from borrowers who have good credit scores. Therefore, if you have bruised credit and less than 20% down payment, you may need a cosigner that has better credit to help you get a home loan.
if you have at least 20% of the purchase price, whether in the form of personal savings or a financial gift from an immediate family member OR you have at least 20% in available equity, if you are an existing homeowner looking to refinance, approaching an alternative lender is a good idea.
Does an alternative lender have to be forever?
Just because you get a mortgage with an alternative lender today DOES NOT mean you have to stay with one forever. In fact, I usually allow people time to improve their credit scores and monthly payments by recommending a shorter-term alternative loan and working to repair their credit in the meantime.
Picking a one to two-year mortgage term, for example, can help you improve your credit bureau so that when your mortgage comes up for maturity, you can go back to a regular conventional lender to get a better interest rate and lower your mortgage payment.
Alternative lenders can be a bandaid while your credit score improves.
Should you choose an alternative lender to refinance?
Sometimes borrowers need to refinance their existing mortgages but for some reason have developed poor credit and are in a different financial circumstance than when they originally got the mortgage.
If you are in this situation, you may not need to refinance with an alternative lender if you are already with a prime mortgage lender like a bank or monoline lender. There are lines of credit products available that can be a short-term fix to high-interest debt relief (e.g. credit cards), which you can use until your existing mortgage matures. These alternative lines of credit can also allow you time to improve your credit bureau.
In conclusion, you can definitely purchase a house with bad credit, but it’s important to consult a professional to weigh out your options and help you make the smartest choice.
Also, some borrowers think they have bad credit bureaus when in fact, their credit is acceptable, so it’s always best to check on this through a professional before signing any mortgage contract.
Do you have mortgage questions? Please call or write. I would be happy to assist you in your mortgage endeavour.
Sarah A. Colucci
Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
411 Queen St.
15 Wertheim Court, Suite 210
Richmond Hill, Ontario
Sarah A. Colucci, Mortgage Agent Lic. M14000929
Mortgage Edge, FSCO Lic. 10680