Borrowers with a good credit score, enough cash for a down payment and high incomes have access to a variety of loan products with attractive terms and rates. We are not in the same boat, however, and many are facing financial hardship, whether it is the global pandemic, prolonged illness, divorce, or job loss. Fortunately, there are ways to qualify for a mortgage loan even with poor or fair credit as well as alternatives to consider. Here is what you can do to access financing, the pros and cons to weigh in, and other options to look into.
Find Your Credit Score
This is the first step, and it will show you whether your score is as bad as you think. Scores range from 300 and 900 where 680+ is considered good, 600 to 679 is fair, and below 599 is poor. Request a credit report from TransUnion or Equifax to find out how you fare. If you don’t need a detailed report, you can also use an online tool to check your score. Once you’ve done this, you will know what loan products you are likely to qualify.
If you have bad credit, you may still qualify but the interest rate can be in the 10 – 18 percent range which is quite high. With a good score, you can expect to get a mortgage with an interest rate of around 2.5 percent. Note that banks offer lower rates compared to private lenders and trust companies.
What to Do to Get Mortgage Financing
To benefit from lower rates, it pays to try to improve your credit score, especially if you don’t feel any urgency to buy a property. The main things you can do are to pay your bills on time and keep credit card balances low. It is important to pay your bills in a timely manner, including gas, electricity, and water as well as any debt payments that you have. Your FICO score which is what most banks use comprises 5 elements – new inquiries (10 percent), payment history (35 percent), credit mix (10 percent), age of accounts (15 percent), and credit usage (30 percent). As you can easily see, your payment history is one of the most important factors. Not everything goes on your file, however, examples being:
- Declined applications
- Driving and parking fines
- Savings accounts
- Salary or wages
- Soft searches
- Criminal record
You also need to stay under your current credit limit to show finance providers that you are good at handling debt. It is important to keep balances low to reduce your credit utilization ratio. To calculate it, add all outstanding balances that you have and divide them by your total limit. As noted, credit usage makes for 30 percent of your FICO score, and you must try keep your utilization rate low. A good credit utilization rate is anything below 30 percent, showing financial institutions that you are a responsible spender.
You may also want to keep any old accounts that you have as they account for 15 percent of your score. If you close old card accounts, this will affect (shorten) your credit history so it is better to keep them even if you rarely or never use them.
Another way to improve your score is to apply for a secured card as long as your financial institution reports to the main bureaus. You will need to make a deposit which is usually equal to or higher than your credit limit and can vary from $200 to $3,000. This is a form of guarantee for your bank in case you default on your payments. While finance providers require a deposit, secured cards work pretty much like standard ones in that you can make in-store and online purchases, book flights and hotel stays, etc. Getting a secured card makes sense only if you make small purchases and pay the balance in full. This will help keep your credit utilization ratio low. If you make late payments, on the other hand, you can get stuck paying a lot in interest.
Finally, if you have high interest debts such as payday loans or credit cards, what you can do is transfer them to a personal line of credit. As they come with lower rates, you will save on interest charges. Moving high interest balances to a balance transfer credit card is also a way to take advantage of promotional rates which can be low or zero over a period of 6 to 12 months.
Pros and Cons of Buying a House with Bad Credit
It may come as a surprise but there are some advantages to buying a house with fair or bad credit, one being that it will help you build equity. If home prices are stagnated or depressed, you will not be able to build equity but will benefit from price drops. In fact according to the Canada’s housing agency home prices are expected to decline by 25 percent in oil-producing provinces and between 8 and 19 percent elsewhere.
There are downsides to buying a home as well, one being that you are likely to get a smaller loan than what you need. Financial institutions look at your debt-to-income ratio to determine the amount that you qualify for. If you have a lot of debt, then you will not get an offer worth accepting. Buying a house only makes sense if you have saved enough to make a sizable down payment. This not only shows banks that you are a responsible buyer but may help you to get a decent-sized property. Even so, make sure you will be able to pay essential expenses such as health and auto insurance coverage, outstanding debt, utilities, groceries, gas, child care, and property tax.
There are also alternatives to look into like borrowing from your insurance policy or retirement plan, seller financing, and getting a co-signer.
Refresh Financial offers a secured card that helps users to get a credit boost by making timely monthly payments. There is even a feature that allows you to get an idea how your repayment and spending patterns affect your credit rating. You can use their handy online calculator to check your utilization rate. For example, if the balance is $100 and the limit $600, then you have an optimal credit utilization rate (17 percent). There are other benefits for users, one being that payments are reported to both bureaus. Another is that the higher your credit score is, the lower your interest rate.
Also a good choice to fix your score fast, the Home Trust Secured No-Fee Visa has been voted 2020’s Best Credit Card for Rebuilding Credit. You will not only benefit from a zero annual fee but you only pay interest on your outstanding balance. The card allows you to make purchases and pay online up to your deposit limit. Home Trust also allows you to choose a deposit limit that works for you, and it can be as low as $500 and as high as $10,000.
If you can’t get a secured card, one option is to apply for a prepaid card that you can use to pay for services and goods. It is not linked to a credit, checking, or savings account and allows you to keep cash for later use. A major drawback is the fact that your payment history will not be reported to the credit bureaus. Still, they offer some benefits such as ease of use and safe and secure payments. Prepaid cards are easy to reload, and there are different ways to do this – in person, online, by direct deposit, or via bank account transfer.