Bad credit mortgages and private lenders
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Bad credit mortgages and private lenders
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Mortgages for people with bad credit
Sometimes life goes awry, a failed business, job loss or maybe a bad divorce and your credit gets temporarily damaged. Life is full of ups and downs. There are plenty of mortgage lenders that understand that good people have bad credit and specialize in helping people get over periods of damaged credit.
What is the Best Bad credit mortgage strategy
Typically your objective should be to secure a short term mortgage up to 2 yrs, during which time you repair your credit score after which you can apply for a traditional mortgage at lower rates.
How much down payment do I need to put down for a bad credit mortgage
Typically you need to put down at least 10% and more likely 15% to be approved, if you can put down more even better. The more you put down the lower the risk to the Lender so the lower the interest rate.
What Income verification do I Need for a bad credit mortgage
Lenders prefer borrowers to be in long term, permanent employment with regular income otherwise you will need as much supporting paperwork to verify income as possible.
What mortgage rate should I expect on a bad credit mortgage?
Mortgage rates on bad credit mortgages are risk based, the higher the risk to the lender the higher the rate. Mortgage rates can be as high as 20% depending on the property, borrower and current economic conditions. Every client is evaluated on an individual basis based on ability to pay back the loan.
What lender and broker fees should I expect on a bad credit mortgage?
Lender and Broker fees can total 3% of the loan amount which can be added to the loan amount.
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Bad Credit Mortgage Lenders
There’s over 100 different institutions offering mortgages in Ontario catering to every type of borrower. A large and growIng percentage of Canadians don’t qualify due to credit or income for a prime mortgage through an ‘A’ lender. There are however two other lending options available to consumers, B lending and private lending. So if you don’t qualify for a prime mortgage from a scheduled bank; BMO, RBC, etc, you can still get a mortgage.
Bad Credit Mortgages From B (sub prime) Lenders
(Trust companies, Credit Unions, Monolines)
With the debt loads that most Canadians are carrying these days and with more than 30% of working Canadians either self employed or on commission income, ‘B’ lending is a popular and proven source of lending.
B lenders are large Canadian institutions (Trust companies, Credit Unions, Monolines) offering a variety of lending mortgage products.
B lenders still require a credit score but will allow more transgressions than ‘A’ lenders.
Clients that fall into the ‘B’ category would be missing one of the major components that the banks and other ‘A’ lenders require such as income or good credit. They maybe recently bankrupt, they might be self employed and do not show their income or maybe have to low of a credit score to qualify with an ‘A’ lender.
This type of lending is often offered as a short term solution until the client either gets their good credit back or has the income to qualify through an ‘A’ lender.
‘B’ lenders provide an excellent lending option to the consumer.
Interest rates are 1 or 2 % higher than ‘A’ lenders. There are sometimes arrangement fees of around 2.00% to 3.00%.
Bad Credit Mortgages From Private Lenders
(MIC’s, Syndicates or Individuals with money to invest)
These lenders are often wealthy groups or individuals who are searching for a better return on their money. They work with lawyers or set up their own companies to loan out money to consumers.
These lenders lend on equity in the property. They are not concerned with credit or income but will review both to get an overall feel for the applicant. Their main interest is the property. Private lenders will lend on properties that nobody else will such as churches, farms and raw land. Private lenders often finance construction projects because they are more flexible than institutional lenders.
The terms are usually short and not over a 2 year period. Interest rates are higher than ‘B’ lending between 6.00% and 20%.
Why Mortgage rates are higher for clients with bad credit
The simple analogy is that of motor insurance; if you have an accident or commit a traffic offence your next years insurance will go up, same with mortgages if you damage your credit your next mortgage loan will have a higher interest rate.
The Mortgage Lender View
A Mortgage Lender making a loan
What Questions does a bad credit mortgage lender ask?
- Where is property? :- most bad credit mortgage lenders have clearly defined geographical territories that they are familiar with and loan to.
- What type of property is it? :- single family home, rental, duplex, condo, farm, ranch, commercial, industrial etc.
- What is the loan to value (LTV) and loan amount?
- What type of transaction is this? :- refinance, purchase, renewal.
- How was the value determined? :- tax assessment, realtor valuation, appraiser, other.
- What is the financial solution of the borrower? :- bad credit, insufficient income, newly employed…
- Why don’t they qualify conventionally? :- new to Canada, divorce…
- What is the exit strategy? :- How will the loan be repaid and when?
- Other info to help the lender grant the loan :- remember the lender wants to make the loan but only if satisfied it will be repaid.
..having the answers to most or all will expedite your loan application.
What is defaulting on a mortgage?
A mortgage default means that you violated one or several of the terms of your mortgage agreement. Your mortgage agreement is a contract that lists all the terms and obligations of your mortgage. The most obvious default is failure to make a required regular payment. However, a number of other things can be classified as defaults as well. These include:
- failing to have adequate insurance on your property
- failing to pay your property taxes
- putting another mortgage on the property
- failing to keep the premises in a reasonable state of repair, and
- selling the property without the bank’s consent.
Because the home is the bank’s security for the mortgage loan, it has an interest in maintaining the home’s value. Failing to have proper insurance or failing to pay property taxes, for example, can jeopardize the value of the property.
What happens if you default on your mortgage?
Financial institutions have a number of options once a mortgage has gone into default. The bank or mortgage company may first send you reminder letters or call you. It will usually then send you a demand letter, which demands payment of the outstanding balance. If you still fail to pay, the bank can take possession of the property, and ultimately sell the property under the terms of the mortgage agreement or by foreclosure. Any costs incurred by the bank when selling your home is added to the amount that you already owe.
If you cannot make the mortgage payments, but your home is worth more than the outstanding balance of the mortgage loan, you may want to sell the property. This way, you will be able to pay off the financial institution and still keep the equity which is the difference between the outstanding loan amount and the amount you received when you sold it.
Defaulting on your mortgage can lead to a range of serious consequences. If you are experiencing financial difficulties, before allowing a default to occur, it is a good idea to contact the institution that holds your mortgage.
If you cannot make your mortgage payments and cannot reach some agreement with your financial institution to deal with the situation, you should seek advice from a lawyer. Your lawyer may be able to delay or prevent you from losing your home.
What is Credit Counseling?
Managing debt and your finances can be overwhelming if you don’t know how to do it. The trick to successful debt management is knowledge, and reading this is a sign that you’re looking to improve your financial situation. To Resolve debt issues you need a definite goal, a clear plan, and a serious commitment to change.
It can be a huge help to have someone with expert knowledge help you to develop your plan to credit repair, which is where a credit counselor can help. There are some not-for-profit organizations that can help.
How can a credit counselor help?
- They will examine your financial situation to establish your debt, your income, and where you can save.
- They will discuss your options and what is available to you based on your financial situation.
- They will aggregate all of your debts into one payment so that you only have one payment to think about.
- They will negotiate on your behalf with the Lenders that you owe money to and maybe get them to lower their interest rate or reduce some of the debt.
- Ultimately, lenders want to recover as much money as possible so they are often willing to do this.
- A credit counselor can teach you how to fix your credit, rebuild it, give financial coaching and show you how to budget so that you never fall into debt again.
Why is good credit important?
Today having good credit provides you with far more opportunities than buying a home or financing a car.
Common advice used to be “Never spend your money before you’ve earned it” and people could choose to live solely off their weekly paycheques. It used to be that if somebody damaged their credit they would vow to stop using credit altogether to avoid getting themselves into another mess. Nowadays though it’s hard to live without credit.
Consider how having good credit could impact you in each of the following areas:
A Mortgage: Gone are the days of buying homes for a few thousand dollars. The price of a home would be a staggering amount if you were to consider paying for it in cash. In today’s market you’ll need to rely on mortgages to finance your housing needs.
Mortgages for people with bad credit are available but having good credit will save you money and make life easier.
Transportation: Buying a car with cash is nice, but most Canadians need a loan using their credit. Having good credit will get you a lower interest rate and save you money.
Employment: Many employers will routinely run a credit check before new hires to get an idea of their income needs. If you have bad credit your employer may worry that the compensation they offer may not be enough and that you’ll leave the position once you find a higher paying job. This can decrease your chances of getting hired.
Basic utilities: Many people think electricity a basic need but it’s not considered a right. You’ll effectively be borrowing the first month of electricity and if you don’t have good credit the electric company will want a large deposit. Ditto for water, cable, internet, etc.
Dreams, Goals and Health: Loans can help get a business idea off the ground or pursue a long-term dream. There may be a time in your life or a family member’s when your savings and insurance aren’t enough to cover your health needs. Having good credit can protect you in emergency situations.
How to Get a Mortgage with Bad Credit
Before a lender will grant a bad credit mortgage or bad credit mortgage refinance, they must first be comfortable the applicant is not a financial risk. Bad credit mortgage qualifications vary from company to company. The following are a few common criteria:
A bigger minimum down-payment
With perfect credit, it is possible to get a mortgage with as little as 5% down. If you have bad credit, most but not all mortgage lenders will increase this minimum to 15% of the value of the home. The higher your downpayment, the more likely it is that you will qualify for a bad credit mortgage because the lenders exposure is less.
Proof of sufficient monthly income
In order to qualify for any mortgage you must be able to prove that you have enough income to repay the money and that you’re financially capable of handling a home mortgage. In order to figure this out, lenders will want to review your gross debt service ratio (GDSR), which is the percentage of your gross monthly income that can be used for housing costs (mortgage payment, utilities, and property taxes). Mortgage brokers usually want the bad credit mortgage seeker to keep their GDSR under 35%; under 30% is even better.
A professionally appraised property value
Before a lender will give you a mortgage, they will require proof from an appraiser that your potential home is worth more than the mortgage amount. So that if for some reason you are unable to make the mortgage payments the lender can take possession of the property and sell it to recover their investment.
A reliable co-signer
Even with a good downpayment and steady income, mortgage lenders often require a co-signer to guarantee a bad credit mortgage. A co-signer gives the lender added protection as the co-signer will be responsible for the mortgage if you don’t make the payments. If you can ask a friend or family member who has good credit to co-sign on your application.
If you have bad credit, no credit, or have filed bankruptcy in the past you can still get a bad credit mortgage or bad credit mortgage refinance.
To know exactly where you stand fill in an Application.
How to protect your credit against identity theft
Professional thieves make a lucrative career out of identity and credit theft, don’t be a victim.
- Check your bank and credit card statements each month to view your spending over the month and alert to you to any suspicious activity.
- Obtain a copy of your credit report once per year to look for suspicious activity. There are two credit reporting agencies in Canada, Equifax and Transunion, they will provide you with a free mailed credit report annually if you ask. You will find their information on you very revealing. If there is suspicious activity notify them that your identity may have been stolen.
- Keep a list of the contact information of your cards so that if they are lost or stolen you can report it immediately and have them frozen.
- Make a point of keeping your financial institutions up to date with your current telephone numbers and email addresses in case there is fraudulent activity on your account and they need to contact you.
- Only give your credit card number to reputable companies. If you’re asked for your information over the phone, call them back using the institutions listed phone number. Never give out your information over email. Only share information on websites that begin with Https://; the “s” means it’s a secure site, no “s” means it’s hackable.
- Be careful at ATMs especially at unfamilar locations and airports. Don’t lose sight of your card during transactions. Where possible use an ATM within a bank and always protect your PIN.
How does my Credit Score affect my mortgage opportunities?
There are two credit agencies that track your credit behaviour and score you accordingly; Equifax and Transunion. Your credit score is available to companies that are considering advancing you funds so they can determine from your historical performance how much risk you represent.
After analysing your financial situation the credit bureaus give you a score between 300 and 900 points, with 300 the worst and 900 the best.
The higher the score the more lenders will be available to you and the lower the interest rate will be. Even with a low score we have lenders who will give you a mortgage providing they’re confident of being repaid. Having a mortgage and paying it in a timely fashion will also improve your credit rating for the future.
How often do the Credit Bureaus update the scores?
Credit scores are an accurate picture of your borrowing behaviour and updated on a daily basis. If you have bad credit and are making responsible decisions your score will reflect that every day. Alternatively, if you are making poor credit decisions this will damage your score just as quickly.
How Is The Credit Score Calculated?
The exact method used to calculate your score is a closely guarded secret and not available to the public. The bureaus do however provide the criteria they use in their calculations.
Your score will is calculated on your payment history, how it’s been used, how long you’ve had each individual credit account for, the frequency that you apply for credit, and the types of credit. Each of these criterions have different weights.
Payment history (35% of score)
The Bureau will look at how timely you pay your bills. If you are late then how late, if any bills have gone into collection, and if you’ve declared bankruptcy. If you’re in the process of repairing your credit it is essential to pay your bills on time to show lenders that you are now a responsible borrower. It’s never too late to start fixing your credit.
How much you depend on credit (Determines 30% of score) If it appears that you depend heavily on credit for your lifestyle it will reflect badly on your credit score. Try to keep your credit card balance under half of the limit. Missing payments is very frowned upon so always pay at least the minimum payment every month.
Borrowing history (Determines 15% of score) The length of time you’ve had a particular credit account impacts your score. Having had a credit account for many years and always paying it will help your credit score.
Applying for new credit (Determines 10% of score) Don’t make multiple credit applications at the same time. Because each lender will be contacting the credit bureau for your credit history, and this will negatively affect on your score.
How you use credit (Determines 10% of score) If you use credit to pay for everything from cash advances to other type loans could adversely affect your score. Using more credit doesn’t mean a better credit score, use it wisely. Lenders want to see you use credit but aren’t dependent on it.
It’s important to pay attention to all of the above to rebuild your credit or build credit for the first time.
How to Correct Errors In Your Credit History
Your credit score is a summary of your borrowing history and is a key component for the lender to decide to grant you a loan or mortgage.
If you think you have a reasonable credit history and it’s not reflected in your credit score then maybe there is an error.
You probably won’t realise there’s anything wrong with your credit score until you try to borrow money and the lender rejects your application for a loan or only agrees to a loan at a high interest rate.
If you think that there’s errors, you should begin by giving Equifax or Transunion a call and request a copy of your credit report. Reviewing your credit report will confirm any suspicions you might have.
What are some causes for errors?
Sometimes it can be mistaken identity, a clerical error, someone with the same name as you has had their history applied to your account.
More common is identity theft. The rate of identity thefts have been on the rise and protecting yourself has never been more important. You should routinely check your credit history once a year to check for suspicious activity; the sooner you spot identity theft the easier it is to fix.
How Do I fix errors?
If you discover an error, you will need to contact the organisation that issued the original credit and file an investigation request to the credit agencies. If you feel that your concern is not being taken seriously you should contact Consumer Affairs and proceed accordingly.
How Long Does it Take to Repair Bad Credit?
After damaging your credit score it will be difficult to find creditors to lend you money or offer you a mortgage, and when you do, you won’t get a very competitive interest rate.
It’s depressing but not hopeless; if you play smart you can fix your credit in a relatively short time. So how long does it take to rebuild your credit? That depends on your starting point and your definition of a “good credit score”. Credit scores are rated on a scale of 300 to 900, with the higher number being a better score. The following will help explain how your score will impact your borrowing ability:
Credit Score of Between 300-549 It’s going to difficult to get credit and you need to continue paying your bills on time and wait for your score reaches the next level.
Credit Score Between 550-699 Getting above the 600 score is critical to getting some credit. If you’re paying your bills on time and getting your debt levels down you can get to the 600 level in quite a short time. At this stage the credit that you get will come at a relatively high interest rate because from the lenders perspective you’re still a significant risk.
Credit Score Between 700-759 At this point you will have no problem getting credit and it will be at reasonable interest rates.
Credit Score Between 760 or Higher When you’ve hit 760 or higher you’ll get the best interest rates available and your credit problems are behind you.
Your credit report will see improvements from the moment you start to pay your bills on time and lower your debt.
In Ontario bad debts on your credit bureau are deleted after 6 years and no longer appear on your record. Don’t forget the credit bureaus are legally obligated to send you a FREE credit report once per year if you ask. So ask.
How to Rebuild Your Credit for Mortgage
Having bad credit will make getting a loan or a mortgage difficult. Credit repair takes time and commitment but it gets easier the more you understand how it works. It should be the top financial goal for everyone with a poor credit history.
Determine the root cause of your poor credit There are many causes why you might have poor credit and it’s important to identify the reasons so you can repair the problem. Bad credit is caused when you haven’t been a responsible borrower, or your your credit cards are maxed out all the time, or you haven’t paid your bills on time, or you have an unpaid outstanding loan. You should begin by obtaining a copy of your credit report from either Equifax or Transunion or both.
- Create a budget and remember to use it The key to getting control of your debt is by changing your spending habits with an itemized budget. Make a budget by drawing up a list of your monthly expenses, include your debt repayments and some for savings and then compare it to your income. You’ll need to cut costs to lower expenses everywhere you can, which could involve lifestyle changes. Without a written and followed budget, you’ll be in the dark acting on gut feeling and impulse.
- Get your debt down With a budget done you’ll know clearly what your financial situation is. It’s critical that you pay down debt to show creditors that you’re serious about paying back loans. Pay back your highest interest loans first and most aggressively because you will save money on interest. Make a payment on every debt even if it’s the minimum or just a dollar because even a payment of a dollar registers as payment and shows intent.
- Always make scheduled payments on time Show lenders that you respect them by always paying your bills on time every time.
- Keep your credit building Even after you have paid back all your debts, don’t stop using credit. It’s not enough to be clear of debt, to build your credit you need to use it. Credit is interest free if you always pay all the bill on the date specified.
How to Get A Mortgage After Bankruptcy?
Before filing for Bankruptcy consult a knowledgeable financial advisor. Bankruptcy
should be used as a last resort for repaying debt. After you have filed for bankruptcy and your debts have been absolved it’s critical to start rebuilding your credit.
It takes time and commitment but if you follow our simple guidelines you will be able to get a mortgage and rebuild your credit quite quickly.
Spend less than you make You need to be very conscious of both your income and your outgoings.
Start Saving Now that you don’t have any credit, you need to have a rainy day fund for emergencies. Put some of your income into a savings account. It’s a good habit.
Always pay all your bills on time, all of the time Ensure that your bills get paid on time because any blemishes on your credit report will make it harder and it will take longer to repair your credit.
Apply for a secured credit card, not having a credit card means you can’t buy anything online, plus other inconveniences. By putting down a small deposit you can get yourself a secured credit card which works just like an ordinary one. Your spending limit is equal to your deposit or just a little more limiting the lenders’ exposure to loss.
If you fail to make your credit card payments you give the lender will take payment from your deposit. This lets lenders take the risk of lending you money while you rebuild your credit.
Get a small RRSP loan Save up the minimum and open up an RRSP. Then borrow against the RRSP and deposit it into your RRSP. Now you have $X in RRSP, which means that you’ll get a tax refund at the end of the tax year. Use the tax refunds to repay the bank. This will help you reestablish your credit. Ask your bank for details.