So you’re thinking of purchasing a home or taking out a home equity loan -- but when you get your credit checked, you discover that you have poor credit, and the banks won’t lend to you. What’s a hopeful homebuyer to do?
Luckily, there are still plenty of options available to you, whether you want to mortgage your first house, or simply qualify for a Home Equity Line of Credit (HELOC) to cover a temporary expense. The first step you can take is talking to a mortgage advisor or broker to discover your options.
What is Poor Credit?
As you probably know, every Canadian over 18 is assigned a personal credit rating. This three-digit number lets banks and other financial institutions know whether you’re reliable when it comes to using financial services responsibly and paying back loans on time. The highest possible credit score is 900. The lowest is 300. A “good” credit score is usually defined as anything above 650. Between 550 and 649? Your credit is “fair”. Below 550? Your credit score could probably stand some improvement.
So how does one go about improving their credit score?
The best way to improve your credit score is to use bank services and prove that you can be trusted with money. So, for example, taking out a small loan and making above-minimum payments, on time, can go a long way toward improving your score. Unfortunately, since your credit score is a major factor in a bank’s decision-making process as to whether or not you qualify for a loan, bad credit can turn into a self-fulfilling prophecy.
Does this mean it’s impossible to get a home loan with poor credit? Thankfully, no. While banks are under strict federal regulations to avoid lending to those with poor credit, there are other lenders and financial entities that you may be able to turn to if you need a loan -- particularly if you own a home that you are able to use as collateral.
Who Can Lend to People with Bad Credit?
What type of lender you can approach as a poor credit borrower depends on just how bad your credit rating is. If your credit rating is just below 600, then you may still be able to qualify for a subprime mortgage.
If your credit rating is under 550, then you’ll probably have the best luck borrowing from an alternative lender. This might be a private lender, a mortgage syndicate, or a mortgage investment corporation. These lenders aren’t required to follow the same strict standards as banks, and so they generally aren’t as concerned about your credit rating. An alternative lender will focus more on the equity in your home, and your income status. As long as your income is stable and you have at least 20 percent available equity in your home, you can get approved for a mortgage or another home loan from an alternative lender.
Banks generally won’t lend mortgages to those with credit ratings below 600, however, it may still be possible to take out a smaller home equity loan, such as a HELOC.
What is a Poor Credit Loan?
Loans for borrowers with poor credit are structured to help mitigate some of the risk that comes with lending to someone with a bad credit history. Most poor credit loans come with higher interest rates than their prime counterparts -- for example, a prime mortgage interest rate may be around 5 to 10 percent, while a subprime or bad credit mortgage can carry interest rates as high as 15 to 20 percent.
The better your credit rating is, the more negotiating power you have for securing a better interest rate. In addition, as you continue to make payments on your loan, your credit rating may improve. If it improves to the point where you can qualify for a lower interest rate, then it might be beneficial to look into refinancing your mortgage.
Before you take out any kind of home loan, it’s important to evaluate your own finances. Can you afford to make the monthly payments without unreasonable sacrifice to your lifestyle? Can you expect that your income will remain at least stable over the term of your loan? If you incur a sudden expense due to, for example, a flood, fire, or car accident, do you have enough saved to cover the emergency while still making payments? An experienced professional like a mortgage broker can help you review your budget, as well as understand all the terms of a loan before you agree to it.