Because buying a home is usually considered to be a good investment, many people want to get into the real estate market, regardless of their credit history. Right now, the real estate market is favourable to buyers since interest rates have remained low for so long. But for those who have a bad credit history, buying can be tough. In 2012, the Globe & Mail reported that more than one in eight Canadians will declare bankruptcy or negotiate a debt settlement with creditors. This means that there are a lot of Canadians with bad credit who recognize the value in purchasing a home. Here are somethings to keep in mind if you’re buying a house with bad credit.
You might need to wait two years after you’ve been discharged from bankruptcy or consumer proposal before you can even apply for a mortgage. Most lenders won’t even consider lending you the money until after this two-year period is up. Even after the two year period is over, you will need to prove that you are stably employed with an income that you can prove.
If you can’t wait for those two years to pass, it is possible to get a mortgage, you’ll just need a really big down payment. Instead of putting down the minimum 5% with a mainstream lender, you will need to use an uninsured lender like Equitable Trust or Home Trust. This type of lender will expect someone who has gone through bankruptcy to put down at least 25% of the home’s value.
Since lenders price mortgages based on risk, you’ll pay higher rates if you’re buying a house with bad credit. A non-prime mortgage rate would range anywhere from 4 to 5% and is dependent on things like income stability, equity, property and the reason why you’ve suffered from poor credit.
During the two year period after your bankruptcy or consumer proposal, you will need to re-establish trust in the eyes of lenders. You can do this by having two credit accounts that have a borrowing limit of at least $1,000-$2,000 and they can range from credit cards, lines of credit, car payments, etc. Many people elect to re-establish credit with a non-prime mortgage or a secured credit card. You will need to put down a deposit to prove that you are trustworthy and be sure to pay on time for one to two years and never spend more than 60% of the limit.
Overall, it is possible to purchase a new home with bad credit, it just might be a little harder to do so. If you can’t afford to purchase a new home right now, you shouldn’t feel the need to rush. Unless you have a 25% down payment and your new mortgage payment is more affordable that your current rent, you’re probably best waiting a year or two and taking the time to save up and rebuild your credit score.
If you would like more information about buying a home with bad credit, please contact me today!Posted by Greg Dewar on