Having good credit is commonly recognized as an essential part of adulthood, but the question remains why? Having a high credit score is necessary to receive the best interest rates on loans. Interest rates may sound like a small price to pay, but depending on the size of the loan, these fees can quickly cost you thousands of dollars, especially when you’re buying a home. Thus, having good credit is essential to getting a mortgage loan in Canada!
Contents
- Why Good Credit is Important to Receive a Mortgage Loan
- What is a Mortgage
- How to Get a Mortgage with Bad Credit
Why Good Credit is Important to Receive a Mortgage Loan
To get approved for a mortgage a credit score of 680 or higher is needed to qualify for the best mortgage rates in Canada 2021. A credit score between 600 and 680 would still be considered for a mortgage but will have high-interest rates. A high credit score secures you a position for great mortgage rates and excellent terms because it tells lenders that you’re able to pay bills on time responsibly. The higher the credit score, the more trustworthy borrower mortgage lenders see you. As a result, a good credit score allows you to save money on your mortgage payments, which will enable you to save up to six figures worth of interest throughout your lifetime. A good credit score also grants more flexibility regarding the terms and conditions associated with a mortgage.
What is a Mortgage
A mortgage is a secured loan that lenders give to borrowers to purchase a home. With a secured loan, the borrower promises the house as collateral to the lender if they stop making payments. If the borrower stops making payments on the mortgage, the lender has the authority to take possession of the home in a process called foreclosure.
When you get a mortgage, the lender gives you a set amount of money to buy the home, depending on your credit score and the price of the house. The loan is given with the agreement that the borrower is paying back the loan with interest. As a result, the borrower does not fully own the purchasing home until the mortgage loan is paid off in full.
How to Get a Mortgage with Bad Credit
Suppose you have a bad credit score and you want to buy a home soon. At Credit360, we highly recommend repairing your credit score before applying for a mortgage to avoid paying high-interest fees. Because if you have a credit score between 575-659, you may have difficulty getting a standard mortgage from a bank or online lender. Still, there are alternative ways to receive a mortgage with bad credit.
Make a Large Down Payment
Making a sizeable down payment of 20% or higher indicates you have the leverage to work with lenders. Providing a larger down payment also suggests that you have a generous income and that you can promptly make payments. A sizeable down payment will not necessarily reduce the interest rates, but it will reduce the regular mortgage payments, allowing the loan to be more manageable. As a result, putting a larger down payment will let mortgage lenders see you as an attractive borrower.
Go Through an Alternative Mortgage Lender
If you have a credit score below 600, you will have difficulty getting approved by most of Canada’s banks. As a result, you will most likely have to work with an alternative lender. Alternative lenders are more lenient to work with poor credit scores. However, the lender requires a heftier down payment between 20% and 35%, with inflated interest rates above average.
Additionally, alternative lenders may add extra fees that traditional lenders don’t like, a loan processing fee of 1% of your mortgage’s value. Also, if you found the alternative lender through a specialized mortgage broker, the broker might charge a finders fee of 1%. The additional 2% can be a costly fee. For example, if a mortgage costs $400,000, the 2% charge can amount to an $8000 fee!
Get a Co-Signer or a Joint Mortgage
One alternative to putting a larger down payment or working with an alternative lender is to get a co-signer. A co-signer promises to make the mortgage payments if the initial borrower is unable to. With a co-signer, it is easier to get qualified for a mortgage from traditional lenders because the co-signer’s credit and income are evaluated for qualification purposes. Be mindful of who you choose as your co-signer, as you would want someone you can trust who has good credit, income, and not a lot of debt.
Improve Your Credit Score
As mentioned before, at Credit360, we recommend improving your credit before applying for a mortgage because it’s less costly than the listed alternatives above, especially if you are in no rush to buy a new home.
The best way to increase credit score is by taking collective steps like paying your bills on time, using 30% or less of your available credit limit, not applying for new credit that you may get rejected for, and not closing old accounts. These steps over time will boost your credit score in the coming months. To learn more check out our blog, Four Ways You Can Improve Your Credit Score.
If you’re still looking to boost your credit score, then Credit 360 is the best choice! If you’re someone with bad credit and want to fix your credit or someone with good credit but want to boost your credit score for the best mortgage rate, then we’re here to help! Our credit repair consultants work actively to find ways to improve your credit score, despite your situation. Don’t let the worry of getting a mortgage with bad credit wear you out because Credit360 has you covered! At Credit360, we believe good credit is essential to living life with peace of mind which means getting the house of your dreams with the best mortgage rates!
Written By: Indojaa Sathiyaseelan
