If you're considering buying a new home, it's important to know that your credit history plays a crucial role in your mortgage application.Traditional financial institutions place more and more importance on your credit rating and may refuse your application if you are considered a subprime borrower.Fortunately, there are solutions to improve your financial situation and obtain a mortgage even if you have bad credit.
But what is a credit score?This is a score that assesses the financial information included in your credit report and is usually between 300 and 900. This score helps lenders make an informed decision on credit approval and can also be usedto determine which mortgage product is right for you in terms of interest rate and credit limit.The higher your credit score, the more likely you are to get a good mortgage.
The calculation of your credit score is based on many factors that reflect your credit behavior.Repayments made of your loans and credit card balances, the total amount to be paid in your credit accounts, the age of your accounts, the different types of credit you use, the amount of credit you use perthe amount of credit you have, the frequency of credit applications and the date of the last application are all factors that come into play.Although the main purpose of the credit score is universal, each financial institution may have its own evaluation criteria.
In Canada, credit rating ranges are established by the credit rating company Equifax.According to this scale, a credit score above 800 is considered very good, a score between 720 and 799 is considered good, a score between 670 and 739 is considered fair, a score between 580 and 669 is considered bad,and a rating below 580 is considered very bad.
It is therefore important to understand your credit rating before applying for a mortgage.If your rating is low, there are ways to improve it, such as paying off debts and settling late payments.You can also get professional financial advice to help you manage your debts and improve your credit rating.Remember that your credit rating can have a significant impact on your long-term finances, so take the time to understand it and manage it wisely.
In Canada, bad credit is generally considered a credit score below 660. Lenders may consider borrowers with a credit score between 560 and 659 to be at risk, which may result in higher interest rates.Borrowers with a score below 560 are considered very high risk borrowers and will likely struggle to get a conventional mortgage.
However, it is possible for borrowers with bad credit to obtain a mortgage.Bad credit mortgage lenders evaluate several eligibility criteria before approving a loan application, including credit report, down payment, income and employment history, debt historyincome and property value.
Borrowers with a credit score below 600 may qualify for a bad credit mortgage if they have a down payment of more than 20% of the property's value.However, if the down payment is lower, the loan is unlikely to be approved.Borrowers with a better credit score and a down payment of more than 20% can access more competitive mortgage products by approaching Type A lenders.
Bad credit lenders also review borrowers' credit history to see how they have managed their credits in the past, including on-time monthly payments, missed payments, late payments, and more.They also check the borrower's income history and employment stability to ensure that he has sufficient financial means to repay the loan on time.
Lenders also look at the borrower's debt situation, as a large portion of income spent on paying off debts can reduce the chances of getting a mortgage.Some lenders require a debt to equity ratio of 39% or less, while others can tolerate ratios up to 44%.
Finally, lenders assess the value of the property to ensure that it is equal to the value of the loan, which would allow them to recover all of their money in the event of default.
Written By Kenny Bruton Mortgage Broker
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