If you want to take out a mortgage loan but have bad credit, it’s important to consider your possible options. Bad credit can often make it challenging to secure a mortgage and may result in higher interest rates, fees, and stricter terms even if approved. In this article, we’ll look into the potential advantages and drawbacks of taking out a bad credit mortgage loan in Ontario.
Elements of Risk in Mortgage Loans
When it comes to mortgage loans, lenders need to consider their borrowers’ income, employment and credit history to minimise the risk of incurring losses on their end. Your credit score is one of the most critical factors that lenders consider when assessing your application. A credit score is a three-digit number that ranges from 300 to 900, and it represents your “creditworthiness.” Creditworthiness is simply a term that represents the extent to which a borrower is considered suitable to receive financial credit, based on their reliability in paying the money back in the past. The higher your credit score, the more likely you are to be approved for a mortgage loan with favourable terms.
A low credit score can be considered a risk to them when offering a mortgage loan. A low credit score indicates that you have a history of late or missed payments, high debt levels, or other financial issues that make you a riskier borrower. As a result, lenders may be hesitant to approve your application or may require you to meet stricter terms.
They’ll also consider the property itself, whether there are any legal or structural issues. If there are any zoning and permits in place, is it in a desirable area, etc. They will also consider the the loan-to-value (LTV) ratio of the proposed mortgage, as a measure of risk.
What are the Benefits of Taking Out a Bad Credit Mortgage Loan?
Although procuring a mortgage loan with bad credit has its inherent perils, there are also a few potential gains to contemplate. It’s possible to save money by paying off more expensive debts with a cheaper mortgage debt. This, of course, depends on your interest rate. You can also take out a bad credit mortgage to quickly make missed payments on your first mortgage or on credit card loans.
Another benefit of taking out a bad credit mortgage loan is that it can help you improve your credit score over time. If you make your payments on time and in full, you can demonstrate to lenders that you’re a responsible borrower – resulting in your credit score improving. This will make it easier to obtain a loan in the future. As your credit score improves, you could even refinance your mortgage at a lower interest rate, saving you money on interest payments.
Finally, taking out a bad credit mortgage loan can also provide tax benefits. In Canada, mortgage interest payments can be tax-deductible, which means that you can reduce your taxable income by the amount of interest you pay on your mortgage. However, this is only the case when the property is used for the purposes of generating rental, business or professional income. This can provide significant savings, especially in the early years of your mortgage when your payments are primarily made up of interest. Keep in mind that tax laws can change, and it’s essential to consult with a tax professional to understand the specific tax implications of your mortgage.
How Does Bad Credit Affect Mortgage Loan Interest Rates?
One of the most prominent detriments of procuring a mortgage loan with unfavourable credit is the tendency for elevated interest rates to occur. Ponder for a moment the perspective of the lenders who would pursue the credit scores of applicants with less-than-satisfactory credit. Such lenders would consider these borrowers as posing a greater risk, and consequently, these lenders would impose amplified interest rates to counteract the riskiness of the situation. This culminates in the regrettable outcome of needing to fork over more funds for interest payments over the course of the loan, thereby rendering monthly payments more formidable to bear.
The precise interest rate you will incur is determined by several factors, such as the house’s location and the LTV ratio of the loan. It is, therefore, imperative to conduct extensive research and compare the rates offered by numerous lenders to obtain the most favourable deal.
How Long Does It Take to Pay off a Bad Credit Mortgage Loan?
The length of time it takes to pay off a bad credit mortgage loan will depend on several factors, including the size of your down payment, your interest rate, and your monthly payment amount. The most common options for a loan period available to home-buyers are 10, 15, 20, or 30 years; these are called amortization periods. The longer the term, the lower your monthly payment will be, but the more interest you’ll end up paying over the life of the loan. However, do note that most private lender mortgages are “interest only” and have no amortization. And as such, these mortgages are not paid down each month.
It’s important to remember that taking out a mortgage loan is a significant financial commitment. You’ll need to budget carefully to ensure that you can afford your monthly payments and avoid defaulting on your loan. If you’re struggling to make your payments, you may be able to refinance your loan or explore other options, such as a loan modification or forbearance.
Mortgage Broker Store Can Help.
Acquiring a mortgage loan despite having a negative credit history is a potentially favourable course of action for those seeking to procure a residence. At Mortgage Broker Store, our specialisation revolves around facilitating mortgage solutions specifically tailored to individuals with lower credit scores. To do so, we collaborate with a multitude of lenders who are willing to provide funds to applicants boasting lower credit ratings. Should you seek a mortgage loan despite poor credit, we can appraise your financial situation with meticulous scrutiny and subsequently provide you with a mortgage that both suits your economic capacity and complies with your requisite specifications. Additionally, we can provide guidance through the intricate application process by offering our assistance with compiling the essential documents and completing the mandatory forms.
Further, we can offer you some help with fixing your credit score over time. We can enable you to acquire a comprehensive comprehension of the parameters that factor into your credit score and furnish you with strategies to improve it, such as discharging debt, honouring payments punctually, and evading the procurement of new credit. Do not hesitate to approach us.