If you have ever applied for a credit card and been declined, you may be reluctant to consider purchasing a home. You may think like most people you can't be approved for a mortgage because you have bad credit or can you?
Before we consider how to get approved for a mortgage, let's briefly touch on the basics of what goes into your credit rating.
Your Credit Score
In a nutshell, your credit score is the statistical likelihood of whether or not you will pay back the you have borrowed. This score is determined by some basic factors. Your credit payment history, your current debt, your credit mix, the length of time you have had a credit history and the frequency you apply for new credit.
FICO scores range between 350 (extremely high risk) and 850 (extremely low risk). In addition to FICO countries like Canada use 0 - 9 to rate your personal rating. This type of credit rating identifies with a letter I (for auto or financing) and/or R (for revolving credit such as credit cards).
The different factors also carry different weight. For example your previous credit history performance determines 35% of your score and the amount of debt your currently carrying determines 30% of your score. Your score is then determined by 15% how long you have credit history, the longer the credit history the higher the score. 10% takes into consideration new credit. If you have been opening a lot of new accounts in a short period of time that could be a red flag you about take on a lot of new credit which sends a red flag and will lower your score. The last 10% is for credit mix. Having credit cards and installment payment loans that are paid responsibly will raise your credit score.
So when taking your credit score into consideration you may be saying to yourself, "that's it I won't get approved for a mortgage because I have bad credit or because I have too much debt." The fact is if your credit score is too low and your score has labelled your credit payment behaviour as "uncollectible" then it is unlikely many lenders will be willing to lend you the money.
Who Will Lend Me Money?
Have You Considered An Alternative Lender?
Before you give up all hope of getting approved for a mortgage, it is important to bare in mind there are many different types of lenders. B lenders or subprime lenders will lend based on the theory the higher the risk the higher the premium. In situations when an A lender like traditional banks and institutions won't approve you for a mortgage, a B lender or even a private lender just might.
B lenders will typically require minimum of a 20% down payment as they generally will not lend more than 80%. Since these mortgages are typically uninsured and are a higher risk, these lenders will offer mortgage products that are a minimum of 1% higher than an A lender will offer.
Private money lenders, on the other hand, are equity based lenders. These lenders are more interested in the available equity of the home than the applicant's credit score or income.
Despite the fact you may have a poor credit score or you have a less than secure form of income, you could still get approved for a mortgage you just need to consider all your options.
If you would like to learn more about mortgages check out the following articles:
About The Author
Rachel Craggy has a license in real estate and has been working in the real estate industry for the last 10 years. Successfully flipping houses since 2015, Rachel has education in interior design and real estate staging, was the owner of a success home staging company in Toronto and has worked with many home owners to help them achieve their real estate dreams.