We all have done things in our past that we might not be proud of. But part of life is moving on and forging ahead right? Well, in the world of obtaining a mortgage from a lender, they’re slow to forgive and forget. In today’s red hot real estate market here in Toronto I have been credit coaching some clients as they want to enter the world of home ownership sooner rather than later. So what options does someone that doesn’t have the greatest credit history have these days? And what can you start to plan now to help get you on the golden path of best rate mortgages? Read on for my breakdown of what you need to know if applying for a mortgage with sub standard credit.
Know Your BEACON Score
You BEACON score (aka credit score) is provided here in Canada by Equifax and Transunion. You can pull your credit score yourself, or have a mortgage broker pull it for you. The benefit of having a professionally trained second set of eyes on your report is that we can tell you what caused the score you received, and how to get that number higher quicker. Generally a score will be between 300-900 points with the best rates coming in at 680 and above.
Just last month Equifax updated their algorithm for calculating scores and has put more emphasis on the utilization of credit. They call it ‘BEACON 9’. What does that mean? Well if you run your credit balances close to the credit limit its going to hit you harder than it did before. If you find yourself in the sub 680 camp don’t fret…there are lenders that would be happy to lend you money on your dream home, but it’s going to come at a bit of a premium for you.
Shopping for an Alternative Lender
This is really where having a great relationship with your mortgage broker comes in handy. Instead of dealing with a single branch manager at one bank, forming a relationship with your mortgage broker that understands your credit issues will help to position you with lenders that are willing to work with your current situation. In the industry the main banks are referred to as ‘A lenders’ while those that won’t generally be eligible for a mortgage at your standard bank will have to work with ‘Alternative lenders’. They have a higher risk tolerance than standard banks, but are fully licensed and insured just like the big banks. A few examples are EQ Bank (formerly Equitable Trust), Home Trust, and National Bank. Unlike the A Lender that offer competitive rates (currently around the 2.44% on a 5 year fixed) you would be looking at interest rates that are 2-3% higher than the A Lenders when going to these Alternative Banks. So that 5 year fixed deal could end up working out to 4.5% or more.
Plan for Fees
When working with alternative lenders be prepared to pay additional fees. Lenders tend to charge 1% of the mortgage amount as a fee for processing the loan and poor credit application. Also, keep in mind that many of the lenders do not compensate us mortgage brokers for arranging financing for them. Often brokerages will charge an additional 1% broker fee on top of this for our services. So in addition to coming up with a larger down payment (see the next point) you’ll have to budget for 2% of the mortgage amount in additional fees.
Always ask your bank manager or mortgage broker what fees you can expect upfront if they don’t advise you. I’ve heard horror stories from friends that have used brokers and banks in the past that never disclosed lender/broker fees only to learn of them at the lawyers office on the day of closing while signing their documents.
Higher Down Payment
So in addition to paying broker and lender fees, the banks will want to see that you have more ‘skin in the game’. You’ll kiss the idea of putting 5% down on your dream home out the door, and awake to the reality of having to come up with 20-25% of a down payment on your purchase. The upside to having to put more money down is that you have at least that much built up in equity in your property and will be facing a lower monthly payment compared to a 5% down option.
A Mortgage Planner is Your Ally
I like to refer to myself not just as a mortgage broker, but a mortgage planner. Why? Because I help to not just line up a mortgage for today, but plan your strategy for tomorrow as well. For anyone that is facing a challenging credit scenario I often recommend a road map that includes a shorter term mortgage and credit coaching to help get your application back on track. By planning and setting a goal to get your credit score higher and working with a mortgage lender and term that is flexible we can get you out of that higher rate mortgage and into an A Lender quicker to save you money in the long run.