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A credit score of 580 means different things, depending on the person behind the score. It can mean a person who currently has his credit cards maxed out and who has fallen a couple of payments behind on them. He’s probably a month or two behind on his car payments as well.
It can also mean a person who had to file bankruptcy almost a decade ago as a result of the financial chaos that a divorce caused in his life. Bankruptcies stay on your credit report long after most people have cleaned up their monetary situations and can keep that score lower than the borrower’s actual financial picture. Many people who have gone through personal struggles several years ago, dynamiting their credit in the process, have later recovered to do quite well. However, their credit scores don’t rise as quickly as they would like.
Both people in these situations will have difficulty finding a bank to lend them money to buy a house. Even though their credit score is the same, though, their real financial circumstances could be significantly different. The person in the first scenario might be living from paycheck to paycheck with almost nil in the bank in the form of savings. The second person might have enough in the bank to make a hefty down payment on a house, but the bank still won’t listen because numbers are numbers.
The good news is that Amansad Financial has helped many people with bad credit find easy mortgage financing so that they can start pursuing the dream of home ownership sooner rather than later. We use our connections with two different tiers of lenders to get our clients the funding they have worked hard to deserve. The traditional banks, with their rock-bottom interest rates, are known as the “A” market. However, we have relationships with the “Alt-A” or “B” market lenders as well as private lenders, also known as the “C” market. “Alt-A/B” lenders charge a rate of interest slightly higher than the “A” lenders, because they accept credit scores that are lower (and represent a higher risk).
Easy mortgage financing even with bad credit
Private lenders don’t even look at an applicant’s credit score, which makes them a popular solution for people who have managed to sock away a sizable down payment and make progress bringing their credit accounts current but have a credit score that is lagging behind their progress. From the perspective of the private lender, the risk is higher, and so you can often expect to pay a few points above the Canadian Benchmark provided the LTV is reasonable. As the LTV and risk increases, so does the rate. However, the upside is that you get into your home purchase sooner. Because private loans only have terms of a year or two, you’re only paying that higher interest rate for a short time. If necessary, you can renew the loan in some cases, or make interest-only payments, leaving the principal unchanged while you devote more money to getting your finances in shape.
If you have enough of a down payment saved up, you can find easy mortgage financing, even with bad credit. Inside the big cities, you’ll find that lenders usually want to finance no more than 75 percent of the appraised value of the home. So if you’re looking at a house that lists at $820,000 with an appraised value of $800,000, you need at least $220,000 to put down payment plus applicable set up fees. This gets your mortgage to $600,000, which is 75 percent of the appraised rate.
But what if you don’t quite have $220,000 to put down? There are some private lenders serving Calgary, Vancouver, Edmonton and other cities in Western Canada who will go as high as 90 percent LTV. If you can find a 90 percent lender, you’ll only need 10 percent of that $800,000 value to satisfy. That means your down payment would be $10,000 ($80,000 + the $20,000 premium you’re paying over the appraised value of the home, in addition to the applicable set up fees which vary from lender to lender)
If you’re buying property outside the city, you’ll need to put more down in most cases. In rural communities, many lenders won’t extend a loan of more than 65 percent LTV. Some will come up to 75 percent, but that really depends on the property. If you’re working with a land-only purchase, the highest LTV ratio you can expect is 50 to 55 percent.
Even so, this doesn’t mean that you should run out and hire an appraiser. Many lenders prefer to have their own performed, and some even take a dim view of potential borrowers who order their own. Instead, wait for the lender or broker to have the appraisal performed. This can be tricky, though. Consider a property listed at $600,000. If you have $150,000 to put down, and the lender wants you to put at least 25 percent down, then you might think you’re in luck. However, if the appraisal comes back at $575,000, the lender is only going to approve a loan up to $431,250. $431,250 + $150,000 only gets you to $581,250, so you don’t have enough to make the purchase unless the seller is willing to come down on the price. Given the hot market in some Canadian cities, you may have a difficult time getting the seller to do that.
Get easy mortgage financing regardless of credit
Some of our clients at Amansad Financial find themselves in trouble with their home loans, needing to sell in order to avoid foreclosure. If you find yourself in this situation, ask a realtor to perform a comparative market analysis (CMA) on the neighborhood in which you live. This gives the lender more documentation to support the application. The realtor has motivation to help you because she might score a listing from the deal if you end up being able to sell the house. No matter what you’re trying to do with regard to loan approval, though, the more supporting documentation you have, the likelier you are to gain approval.