January 3, 2023 SEP Dev

Bad Credit Mortgages – Life Happens

You might be surprised to learn just how common “bad credit Mortgages” are. If you were to consider the entire pool of homeowners out there today, chances are that many of them have less than stellar credit, and yet they’re still homeowners.

Let’s begin with the fact that, most people, at some point in their lives, will face some sort of financial stress. Why? Because life happens, that’s why. Whether you lose your job, tend to your health, or divert your finances to help a loved one, it happens to all of us at some point! Sometimes this financial burden forces us to make certain sacrifices when it comes to meeting our debt obligations.  The key thing here is that the intention is often not to avoid making payments on a debt, but rather, to prioritize where your limited cash flow will go during a period.

Having said that, not all lenders understand this, or rather a more accurate statement would be, not all lenders would have a risk appetite for borrowers who demonstrate a recent history of hardships. These are the typical bank-type lenders, who maintain low-risk lending decisions. Thankfully, there are other options.

When it comes to Bad credit mortgages, there are many lenders out there that lend strictly to those borrowers who have “blemishes” or “bruised” credit. (By the way, notice the difference in how these lenders describe Bruised vs the typical “bad” credit.) These alternative “B” lenders seek to understand the history and story that lead to the credit challenges to assess whether they think you will make your future mortgage payments. The story is key here!

Since B Lenders take on greater risk tolerance, they do not have access to insured/insurable products. This means that for legal reasons, they cannot extend a mortgage loan to their borrowers that represent more than 80% of the value (or purchase price) of the home. In other words, the borrowers will need to come to the table with a 20% down payment or in the case of refinances, have 20% equity in the home. Here are some more general flexibilities that B lenders have:

  • Credit scores of borrowers can be as low as 500
  • Previous Bankruptcies or consumer proposals are not a closed door
  • Debt servicing Ratio’s up to 50%/50% (GDS/TDS)
  • Non-Traditional income sources accepted
  • Use of greater rental income for qualifying purposes

It’s also worth pointing out that B lenders are aware that the goal of every homeowner is to pay off their mortgage while paying the least amount of interest during that process. These lenders don’t expect you to take the typical 5-year terms that you would opt for on the banking side. Most B mortgages are taken for a period of 1-3 years which happens to coincide with the amount of time, someone with “bruised” credit, would need to repair/rebuild their credit so that they can migrate their mortgage back to where they would want to be. This is why, B lenders that offer Bad credit mortgages are not life sentences, but rather stepping stones that offer immediate solutions for your home financings needs, while you work towards meeting the rigid guidelines that exist at your bank.

Another benefit, to these types of mortgage solutions, is that they offer extended amortizations that are either not available or preferred by the banks. Extended amortizations, about the mortgage payment, reduce the amount of the payment during the scheduled period. This can offset the higher payments you might expect from the higher rates that are offered by B lenders. For example, if the bank offers you a 500k mortgage at 5% with a maximum amortization of 25 years, your mortgage payment would be approx. $2,908 per month. On the B side, they can allow for amortizations to extend to 35 years, which would make the same scenario reflect payment of approx. $2,507 per month. Notice anything from a cash flow perspective? That’s right… it’s not horrible. If you are in a situation where you have had some credit difficulties, you might find that you are more interested in cash flow (pun intended).

Once again, we’re not denying that you would pay higher interest in these types of mortgages, but with the right strategy and guidance, you could get right back on track, and from a bird’s eye view, without feeling the interest blow over the lifetime of the mortgage.

If you feel that a Bad credit mortgage might be a solution you would like to explore, or simply want to learn more about the topic, feel free to reach out to us today – at (905) 455-5005

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