YOU WANT TO BE A “FIRST TIME BUYER, BUT HAVE BAD CREDIT. NOW WHAT?

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Your credit score, in my opinion, is one of the three main and key factors that mortgage lenders consider when you’re applying for a mortgage. The others of course being the income you have available to service the debt and your down payment. But if you find yourself on the lower end of the credit score scale, it doesn’t necessarily mean you have to abort your plan to purchase a home.

Let’s face it, renting a reasonable home or apartment is not cheap. Home values are rising. So, the sooner you get into the market, the better. This is why poor credit should not deter you. I will outline some tips for you to get things organized.

IF YOU WANT TO FIX YOUR CREDIT SCORE

Determine the Target Credit Score

There are various options available. However, in very general terms, I would recommend setting a credit score of 650 as your base target. At this level, you should be able to fall into most conventional lending programs providing other things fall in line. Now, it is “important” to understand that much lower credit scores can and do still qualify. Scores of 580 and upwards can still be considered and there are even programs with scores lower than this. So, this is just a guide.

Next, discuss with a mortgage professional

If you need to get to a certain level, you need a road map. What advice can they provide you to get there and what is the timeline? Perhaps your credit score is a result of identity theft or previous challenges that no longer affect your financial stability. If you have good explanations for your current credit status, provide the back up. It will go a long way.

Get Credit Errors Fixed

Follow the Road Map. Together with the advice provided by your mortgage professional, it’s time to get started on the repair. Carefully review your credit report to ensure its accuracy. Carefully review your mortgage professional’s recommendation. Keep in mind that the balances shown may be slightly off due to recent payments that have not yet been recorded. If you do find an error in your report, you can send a written dispute letter to get it fixed. This is worth the effort as it could raise your credit score and open up more loan options to you.

What if You Can’t Wait For Your Credit Score to Improve

Well, in these instances, there are programs available. Usually they will carry a higher rate and down payment, but it will get you into the market. You can also introduce a co-signer or guarantor to help things along. This may even bring the down payment and interest rate down to normal levels.

Make a Larger Down Payment

You may have the option to compensate for your low score by putting more money down. This makes you less risky to your lender as you’ll have more invested in the home increasing your exposure and decreasing theirs.

If you don’t have the cash for a large down payment on hand, look for assets that you can liquidate without taking large losses. Don’t forget to consider RRSP’s as a source.

Is a gift from relative’s a possibility?

Higher Interest Rate

If your score is lower than what is acceptable to mainstream lenders, you may still qualify with a higher rate. A lender may consider you a reasonable risk but charge you a higher rate and possibly fees to compensate for their additional exposure. If you rebuild your credit over the next year or two, you can move back to mainstream lending at that time.

Rebuild Your Credit Score while still renting

Even if now is not the right time, act as though it is. Rebuild your score, starting now. Set a target date for home ownership and start working towards it.

Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (905) 265-0246.

VERICO The Financial Forum Ltd.

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