Worried that your bad credit might stop you from getting a mortgage?

You’re not alone – many people have credit issues in the past, and it can definitely make it hard to get a mortgage on your terms. That said, it doesn’t mean you won’t get one, nor does it mean that you’re stuck with that “bad credit rep” for the rest of your days.

What you need to know about getting a mortgage with bad credit

First, you need to see how bad it really is. Checking your own credit can be hugely helpful, and it doesn’t make your credit score worse (repeated checks from lenders can). Knowing your own credit score and how things look is the first step to determining your options.

Option 1: Mortgage with a flexible “A” lender

One size doesn’t fit all in the world of mortgage borrowers, and the same goes for mortgage lenders. While there are some that refuse to lend to you while bad credit still shows anywhere on your credit bureau, others may be more flexible and will lend to you as long as you demonstrate that your financials have improved since the bad credit “episode”. If your credit score is in the 660-680+ range, that’s a very encouraging sign. Plus, if the credit blips showing are dated more than two years back, AND you’ve shown good solid credit on two or more credit products for the last 24 months or more, that is hugely helpful.

Be prepared – the lender might like to see a bit more than a 5% down payment on a purchase, as evidence of your commitment. If you can come up with 10% or more, on a purchase, the lender considers you less risky than if you’re contributing only 5%.

But the mainstream or “A” route is always the one I would consider first.

Option 2: Mortgage with a “B” lender

If a mainstream lender won’t work, you can look at going with an alternative lender. Depending on your situation, this may be the right way to go. Interest rates with B lenders vary depending on your credit picture, income stability and where your income’s coming from, and the size of your down payment. Expect to come up with 15-25% down payment or equity in the property. The lender will also carefully scrutinize the property being mortgaged to make sure it’s in good condition and easily marketable. These last two items are a must; if your credit’s iffy, the lender wants to know that they’re protected in case you default on the mortgage.  Stats show that delinquency rates go up, the lower the person’s credit score is. So until your credit score improves and the negative items disappear, the lender will want some additional security.

Think of the alternative lender as a rung on the ladder that will get you back to “A” territory.

Option 3: Mortgage with a private lender

In some cases, a private mortgage may make sense. A private lender is simply an individual or corporation lending their own money to people whose circumstances don’t fit the A or B lender criteria. Things such as major ongoing credit issues, temporary lack of income, a property that’s being torn down or is in a state of disrepair, and so on, would potentially mean a “no” from the A and B lenders. Expect higher rates, lender and broker fees, and that you’ll be responsible for both your own and the lender’s legal fees. Here you will want to make sure you are working with reputable professionals and a good real estate lawyer to protect your interests and make sure you understand the contract you’re signing. For more detail about the private mortgage option, check out my article here.

Option 4: Consider Rent-to-Own

If you’re not able to get a lender on the “A” or “B” side, you can also check out Rent-to-Own. It’s had a controversial reputation in the past, so it is important that you research who you’re working with, and get a good real estate lawyer working on your behalf. Done right, rent-to-own gets you into the property you want, without the waiting time to correct the financial issues holding you back right now.

How it works:  you pay an up front “Option Payment” which locks in the future price of the property that both you and the seller are comfortable with. The option payment is typically in the range of 1-5% of the purchase price. In addition to paying market rent, you’ll also be paying an additional payment each month which is set aside for your future down payment. Both the option payment and the accumulated monthly deposits are put towards the future payment.

Hallmarks of a good rent-to-own arrangement include the following:

1) being able to pick your own property

2) a very clear outline what happens to your option payment and monthly deposits if you decide to walk away from the deal

3) a defined and easy to follow game plan to make sure that you will be ready, financially and credit-wise, to qualify for a mortgage when it’s time for you to exercise your option to purchase the property

Want to know more?

My hope is to arm you with knowledge that will enable you to make informed choices. To that end:

If you’d like to know more about bad credit, good credit, and how to fix it, check out my other articles here.

If you’re interested in knowing how a bankruptcy or consumer proposal can affect you when getting a mortgage, click here.

Let me know what you think!  I’m always interested in your feedback.

Photo credit:  [c] Stuart Miles for freedigitalphotos.net