Are you wondering if you could get approved for a mortgage with a bad credit score? Put your mind at ease, you are not alone; many people are looking for an answer on how they could get a mortgage loan even if their credit score is poor.
The good news is there are some ways to get a mortgage with a poor credit score. However, expect that you would pay higher monthly payments and interest rates. Of course, a good and high credit score is always better; the perks are low and affordable interest rates.
What is the minimum credit score to get a mortgage?
It depends on what type of mortgage you are applying for, and it also depends on which lender you are working with. Some lenders are more likely willing to work with a bad or poor credit score.
How to check and understand your credit score?
You are responsible to know your credit health. It allows you to have an idea of which mortgage loan will fit base on your credit score ratings.
A credit score is a number from 300 to 900 that represents a consumer’s creditworthiness.
A credit score is based on your credit history: payment history, outstanding debts, the total number of accounts, and other factors. Lenders use your credit score to decide if they will approve your loan application, and how much money you can borrow as well as the interest rates.
Credit Score Rating
Excellent (scores 780+)
Very God (scores 779-720)
Good (scores 719-680)
Average (scores 679-620)
Poor (scores 619-580)
Very Poor (scores 570-500)
Terrible (score less than 500)
To review your credit, pull a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through the website AnnualCreditReport.com. By doing this, you will be able to see which factor affects or might affect your credit score shortly.
Effective ways to get a mortgage with bad credit
- Spend time to repair your credit score
As stated above, a high credit score means low-interest rates and monthly payments. You may want to consider repairing your credit score first before applying for a mortgage loan. It will help you to save money, as well as improve your credit score, and enjoy a lot of benefits from having a high credit score.
Here are some guidelines for repairing your credit score.First, pay your bills on time going forward. Payment history has a big role in your credit score rating. Once you have missed paying your bills on time, it will give a negative impact on your credit health. Leave a note in your calendar or notebook so you may not forget your due date bills.
Keep balances as low as possible. Credit experts say you should not use more than 30 percent of your credit limit. However, it does not mean that you cannot use the remaining available credit limit on your card, but it will surely impact your credit score as the Credit Utilization Ratio is 30 percent of your credit score rating.
Do not make too many hard inquiries. You can apply for a new credit card or line of credit but apply only when needed, and better make sure that you will get approved once you submit your application, because it will leave as hard inquiries in your credit report once you got rejected.
Keep unused accounts. If your bank does not charge an annual fee, better to keep your unused or old accounts as it will help you to improve your credit score. Your length of credit history has a 15 percent portion of your credit health.
Start to save for a larger down paymentIf your credit score does not meet the ideal score, your lender may have a second thought to approve your application because you have a low credit score, and it means a higher risk for them to lend you. However, your lender may require you to have a higher down payment to lower their risk.
Saving for a larger down payment (the recommended amount is 25 percent) also helps you to lower your monthly mortgage payments. You will not have to pay for CMHC insurance or mortgage default insurance (it is the protection of the lender, in case you no longer pay your loan), which is mandatory in Canada, for those who will give a less than 20 percent down payment.
Work with a mortgage lenderThey know the best match for your circumstances. A 600 score is the minimum credit score for mortgage approval in Canada from a big bank; otherwise, you will not get approved for a mortgage loan if your credit score is below 600. Some mortgage brokers are willing to work with a poor credit score but expect an extra charge for their service, and that is typically around 1% for a loaning processing fee.
Look for a co-signerIf you have a co-signer you are one step closer to getting a mortgage with a bad credit rating. A co-signer is someone who goes on a mortgage application with the principal borrower who is not totally qualified to get their loan themselves.
The co-signer will have to agree to pay your monthly payments when you are not able to pay for them. The extension of the co-signer makes your application more interesting to the mortgage lender.
A co-signer will be on the loan documents such as the mortgage and deed of trust. They might be on your title property as well, so it’s better if your co-signer is part of your family. It will also lessen the risk for both parties if they are related or in the family circle.
Bad credit is normal, but there are always ways to improve it. Of course, you can get a mortgage with bad credit, but why would you jump into to pay a higher interest rate. There are options, so you don’t hurt your savings, and you pay for the lower interest rate.