Taking a look at homes for sale involves a long-term financial commitment. Sometimes, unexpected life events can take a toll on your finances causing your credit to take a hit. While having a poor credit score will not completely hinder you from purchasing a home, it will take some time and likely cost more overall. If you are currently thinking about buying a home, here are some things to consider if you possess bad credit.
Understand What's to Come
Prior to taking the necessary steps to purchase a home, extensive research should be conducted on the entire home buying process. Knowing the right information beforehand can help to prevent any unwanted surprises and ensure that you are fully aware of what you are taking on.
While it is still possible to get a home mortgage with bad credit, it will require extra time and effort. Because you have a lower credit score, any lenders you find will view you as a high-risk borrower and this will often result in higher interest rates on your monthly mortgage payments. In turn, higher monthly payments to compensate for your credit, or lack thereof, will ultimately lead to higher costs over time.
Find Unconventional Lenders
If you find yourself with a below-average credit score but are still adamant on buying a home, there are still other ways to get approved for a mortgage. While it is unlikely to get approved for mortgage loans from primary lenders such as banks, there are other institutions that cater to people with subpar credit scores such as credit unions, private lenders and trust companies.
Improving Your Chances of Getting Approved for a Mortgage Loan
Applying for a loan with unconventional lenders is not guaranteed for approval, but here are some ways to improve your chances:
- Save for a larger down payment: Being able to provide a larger down payment can show lenders that you are capable of handling an extra financial commitment and can also help to reduce your monthly mortgage payments. It also provides a bit of extra room to save for life insurance so you are confident you aren’t leaving this burden on your family
- Raise your credit: Paying your bills on time or paying off any loans or credit cards can slowly help to raise your credit score.
- Consider a co-signer: Having a third-party responsible for the mortgage can bring down your mortgage rate if they have good credit; it decreases the risk you pose to lenders because it shows that someone will make the payments if you are unable to do so.
Take More Time
It’s important to weigh out all of the possibilities and outcomes when looking to purchase a home with a lower credit score. While you may feel eager and ready to take the next step, you still may not be financially capable of doing so. If your low credit score is a result of your inability to pay off debt or credit cards on time, adding a large financial commitment, such as a mortgage, will likely just add on to the credit troubles that you are currently experiencing. In cases like this, it may be worth it to consider waiting a couple more months or years to work on rebuilding your credit.
If you do happen to have all of your financial matters in order, barring the low credit score, it still may be worth considering waiting a few more months to build up your credit and in turn, qualify for lower monthly mortgage interest rates.
Buying a home with bad credit is possible but it is important to consider how a bad credit score can affect you and your finances in the long run. Prices for Toronto townhouses, detached homes, and condos are on the rise and will require a greater financial commitment. Taking the time to understand what got you in your credit situation in the first place and working hard to get back on track will help you improve your credit and allow you to buy the home you desire.
Zoocasa.com is a real estate website that provides advanced online search tools and data to empower Canadians to buy or sell their homes faster, easier and more successfully. Home buyers can browse real estate listings on the website or the free iOS app.