Bad Credit? No Problem: 5 Ways You Can Still Buy a Home

Bad credit generally describes a record of past failures to keep up with payments on your credit agreements, resulting in the inability to get approved for new credit, like a traditional mortgage loan. It typically means you haven’t paid your credit and other obligations on time, or haven’t paid them at all. Your credit report also takes into account public records such as any state or federal tax liens, bankruptcies, or legal judgments against you.

 

Companies collaborate with credit bureaus (also referred to as credit reporting agencies) to collect your credit history and compile it into a credit report. Each agency maintains its own separate report, and your credit history and scores could vary among them.

 

The bad news is that when it comes to being flagged as having “bad credit” — even just having a credit score below 640 — several of the causes can’t be fixed without potentially waiting years for your score to rise. If you are planning of buying a home having a bad credit is a big issue in getting approved for a mortgage.

First of all, it’s important to know what constitutes “good” and “bad” credit. When lenders query the credit bureaus (like Equifax, TransUnion or Experian), they’re given a full credit report made up of details like your payment history, your total debt load, how much unused credit you have, and more.

All of those things work together to calculate your credit score, which is an estimate of how likely you are to repay any new loan on time. If your score is low, you’re considered high risk.

Remember that lenders are in the business of making money, and someone who defaults on a loan is a major issue for them. When it comes to something like a mortgage, when you’re borrowing hundreds of thousands of dollars, a high risk borrower can mean even bigger trouble.

 

The good news is that in 2019, there are still many ways to buy a home with bad credit.

 

Home Buying with a Bad Credit Options:

 

1. Save for a Larger Down Payment

 

Sometimes your credit is only part of the problem. What can make it even harder are the debt-to-income ratio rules. Lenders want to see you using less than 43% of your income for all debt repayment. That includes your credit card debt and any other debts you might be carrying, so it helps to pay those off first. But what if your mortgage payment alone is still above the 43% mark?

 

A simple solution is to start saving.

 

With a larger down payment, you’ll need to borrow less, which lowers your loan payments, and can give lenders more reason to look favorably on your loan. A good place to aim for is a down payment that’s at least 20% of the purchase price of the home.  Not only will this give you a better chance of getting a mortgage, but with that loan-to-value ratio, you can also avoid private mortgage insurance (PMI), further lowering your payments.

 

2. Borrow Privately

 

This is, admittedly, a tough situation to think about, but if you’re desperate to move into a place of your own, it makes sense.

The people who know you best would obviously know better than a bank if you’re a good credit risk.

The main advantage of receiving a loan from a friend or family member is that your “lender” is more likely to be flexible about payment arrangements and they may be more forgiving of an occasional late payment. Also, when you borrow from a loved one, you often can borrow 100% of the required amount, enjoy lower interest rates (or no interest at all).

Of course, treat a personal loan issued by a loved one with the same respect and professionalism as you would a loan from a bank. If you plan to borrow money from a bank, credit union or other lending institution, you already know you must be prepared on time payments until the loan is paid in full.

 

3. Getting a Cosigner

 

It’s hard to qualify for a loan without strong credit scores and a steady income. If you’re not getting approved on your own, you might have more success with the help of a cosigner.

 

A cosigner is somebody who applies for a loan with you and agrees to pay off the debt if you do not make payments. The cosigner signs your loan application with you (physically or electronically) and guarantees the loan. A cosigner “stands beside” the borrower, so lenders are more confident about approving a loan, now two people are responsible for repaying the loan. At least one of them, typically the cosigner, looks like a safe bet.

 

The primary advantage to this is that the co-signer’s income will be considered in determining how much you can borrow. This might be exactly what you need if your problem is a business for which you don’t yet have two years of tax returns, or if you have other income you can’t use to qualify, such as capital gains income, or investment income you haven’t been receiving for at least two straight years.

Unfortunately, there’s a major downside for your co-signer as well: Being a co-signer to a loan of that size could affect their credit. In the worst case scenario, if you default on your loan and go into foreclosure, their credit will undoubtedly suffer major setbacks.

 

4. Look into an FHA Mortgage – Canada Mortgage and Housing Corporation (CMHC)

 

Most conventional home loans are held privately, by lenders like banks. In the Canada, Canada Mortgage and Housing Corporation (CMHC) is a Crown Corporation of the Government of Canada. Its superseding agency was established after World War II, to help returning war veterans find housing. It has since expanded its mandate to assist housing for all Canadians. The organization’s primary goals are to provide mortgage liquidity, assist in affordable housing development, and provides mortgage loans to prospective buyers, particularly those in need.

 

You may quulify for CMHC mortgage, if at least one borrower (or guarantor) must have a minimum credit score of 600. In certain circumstances, a higher recommended minimum credit score may be required. CMHC may consider alternative methods of establishing creditworthiness for borrowers without a credit history.

 

See more – https://www.cmhc-schl.gc.ca/

 

5. Other options

 

Buy a House for Cash – It’s not that far out of the realm of possibility! I’ve made it work and there are plenty of ways to make what seems like a pipe dream much more palatable.

 

Buy a Cheap Mobile Home – Mobile homes have their advantages, including lower prices than site-built homes, which is great if you have to pay cash. Plus, if you buy a mobile home on land, you even get appreciation like you do with other homes. Shop Around for Loans – Most banks either sell home loans or want the option to do so, which means meeting the requirements of the secondary mortgage market.

 

OK, so it’s not a quick solution. But improving your credit is always a good idea, and if you can wait a few more years to buy a home, you might even be able to save up more money to afford something better. Start by looking at how to raise your credit score. Find the strategies most likely to work for you and implement them!