It has been an unprecedented year for all of us. The Covid-19 pandemic has affected many aspects of our life as well as affecting the economy as a whole. Many businesses have been forced to temporarily shut, work schedules have been in ongoing upheaval, and some have faced layoffs during this undoubtedly stressful time.
Like the economy as a whole, many have taken a hit to their pocketbook and may have suffered in the realm of personal finances. Finances can be tight and it may be difficult to pay bills reliably. The financial squeeze may be too much. As a result, your credit score may have dipped. Perhaps you have been looking to secure a mortgage loan, whether it be a first mortgage on a given property, or refinancing the property you already own.
Before the pandemic, it had already become increasingly more difficult to obtain mortgage financing with the overall tightening of restrictions surrounding mortgage approval by the traditional lenders including the big banks. The mortgage stress test has been harder to pass and has left many feeling that their goal of owning their own home has become an impossible dream.
Does this mean you should not apply for a mortgage loan or consider the option of refinancing your current property? It is still possible to obtain a mortgage loan or other short term financing despite poor credit. One option still open is to apply for a Bad Credit Mortgage Loan.
What is a Bad Credit Mortgage- Understanding your Beacon Score
When applying for a mortgage loan through the big banks the approval criteria rests primarily on creditworthiness including your credit score (Beacon Score). Banks will also be looking at a yearly income that can easily be demonstrated. If you wish to be approved by a bank the credit score needs to be over 600. Credit scores can range from 300 which is considered very poor to 900 which is considered exemplary.
There are two major credit reporting agencies in this country, Equifax and Transunion. Regardless of which reporting agency we are referring to, their primary role is to assign a credit score to an individual based on several defined criteria. These criteria can be summarized as:
- Payment History- do you pay your bills on time?
- Utilization- how much do use your credit cards and how much do you maximize your revolving credit
- Length Of Credit History– how long have you had access to credit or are your accounts open
- Types of Credit Products- which represents the number and types of accounts held
From these criteria, your credit score is determined and allocated. It is important to note that a credit report is essentially a snapshot of your credit performance at any given time and there are ways to improve your credit score moving forward.
If you are working on a contractual basis or are self-employed it will also be difficult to convince the bank to loan out a mortgage because income becomes harder to easily demonstrate. By the same token if you approach a bank with a Beacon Score of less than a minimum of 600 you will likely be turned away.
There is the option of turning to credit unions or established trust companies, however, you will need to demonstrate a credit score of around 550 with a substantial down payment to be considered for a standard mortgage loan.
Under these circumstances, it is best to apply for a bad credit mortgage. What exactly is a bad credit mortgage?
Simply put, these types of mortgages are mortgage loans that are approved on criteria other than your Beacon Score or overall creditworthiness. Generally, these mortgages are shorter length mortgages with higher interest rates, set up fees, and closing costs than standard mortgages. These mortgage loans are offered by private lenders, either individual private lenders or a group of private lenders.
What is the Process of Obtaining a Bad Credit Mortgage In Ontario
Mortgage Broker Store works with a network of Private lenders based in Ontario and across the country. When applying for a bad mortgage loan in Ontario through a private lender(s) you need to follow a few simple steps:
- Research different lenders- Do your homework. Look around at your options. Then approach a private lender prepared so any pressing questions can be answered.
- Know the Equity in your house– Private lenders will be assessing the amount of equity you have built up and using this to determine the overall Loan to Value (LTV) of your property. A private lender will not exceed lending out anything exceeding 75% of the appraised value of your house. This represents an 75% LTV.
- Bring a recent appraisal of your property- When private lenders are assessing overall LTV, a recent appraisal will weigh heavily into their overall calculation of the final loan amount.
- Proof of Substantial Down Payment– Private lenders will likely require you to have a significant down payment when applying for financing. Bring proof of available down payment funds with you to your appointment.
- Any additional Assets– Demonstrating any asset you may have will also play a factor in determining the final loan amount and approval process.
- All Sources of Income– If you are not a full-time salaried employee bring any necessary paperwork demonstrating additional streams of income including any investment income, spousal and child support payments, and contract income.
A private lender will assess the above criteria and work with you to negotiate a loan on a short-term basis, usually between 1 to 3 years. Credit will not be an obstacle. During the bad credit loan if the credit score increases then terms can be negotiated at the end of the mortgage loan to reduce interest rates moving forward.
It is also possible to obtain a mortgage loan through a private lender with no credit, although this is more difficult. Regardless of your credit standing currently, it is always advisable to keep working on increasing your Beacon Score to qualify for the best terms on your loan. Pay your bills on time, put away money towards a larger down payment, pay off all high-interest credit cards, and make a list of your existing and future assets.
Mortgage Broker Store Can Help in Your Search for Bad Credit Loan Options
Mortgage Broker Store can help connect you to an appropriate private lander to meet your mortgage needs. We understand the needs of the borrower and we are always striving towards finding the best match when looking at your particular mortgage and financing needs.
We work with a network of private lenders across the country and are more than happy to guide you in important decisions that you will be making during the private lending process. To obtain a bad mortgage loan, feel free to contact us at your convenience. We will steer you in the right direction in your mortgage search.