The actual process of applying for a mortgage doesn’t change if you have poor or bruised credit, but the source of the funds and the requirements to obtain the mortgage does. The banks weight heavily on credit, as credit history is the only real determinant of loan repayment… and timely repayment at that. Unfortunately, we can confidently say that with bruised credit, applying for a mortgage will change in the following way:
- Since the banks weigh so heavily on credit, credit scores are amongst the most important part in determining their risk factor in investing in your purchase. Therefore, the lower the score, the less they are willing to approve. Traditionally, anyone with great credit (typically above 650), can obtain a mortgage with a 5% down payment. With poor credit however, this isn’t the case. Any scores less than 650 are subject to an exception, and it’s likely that the banks will begin to ask for more of a down payment (10% as an example).
- If the major banks can’t make an exception (see note below), then applying for a mortgage now needs to be done through an alternative lender (most commonly known as a B lender). Some lenders will lend to a maximum of 85% loan-to-value, very rarely any higher than this, so in almost all instances you will need minimum 15% as a down payment to obtain a mortgage.
Note: Exceptions are usually not made by the insurers for any credit that is poor due to missed/late payments (R2’s, etc.) within the last 90 days, prior collections (R9’s), bankruptcies, consumer proposals, beacon rejects, etc.
- Applying for a mortgage through B lenders (assuming this route must be taken) will more than likely involve closing costs not otherwise budgeted for through traditional lending (major banks). Some costs that may be involved through alternative lending are; lenders fee/commitment fee, appraisal fee, brokerage fee, etc. (these are on a case by case basis and it’s not guaranteed that all these costs will be associated – speak with us to find out more about what would apply to your unique situation).
Aside from these differences, applying for a mortgage follows the same process. As we mentioned, the process remains the same, but can take one of two routes. It’s important to know and understand exactly where you stand before moving forward with any prospective purchase. Far too often, we see applicants secure a firm offer on properties with the intent of putting 5% down – before knowing if their credit will even cater to this situation. It’s fair to say that determining your credit score should be the first step taken before applying for a mortgage.
You’ll notice we didn’t touch upon the topic of affordability. Affordability is truly treated on a case by case basis. Often times, you can expect higher rates from alternative lenders therefore increasing your debt servicing ratios (the ratios used to determine your maximum affordability) however alternative lenders typically allow higher debt servicing ratios than the major banks, so it really works itself out in the end. Chances are, you’ll be able to afford just as much is either scenario.
When it comes to applying for a mortgage, we’ll guide you throughout the entire process to ensure that the route taken is both the most affordable and feasible option. If you’re looking to make a future purchase, speak to us well in advance so that we can share the tips and tricks you’ll need to know to ensure you’re ready when applying for a mortgage! Having enough time to fix credit will make the world of difference, especially when there is not sufficient time or resources to come up with a larger down payment.