Home loans for bad credit in Canada
are usually equity based loans that are based on the value of your property.
How can you get home loans for bad
credit in Canada when you may have been turned down by a number of banks? Banks
want you to have a high credit score and a job with verifiable income. You may
have recently lost your job or have had a divorce and cannot meet a banks
requirement, yet you have an average mortgage that they may not renew. Bad
credit does not mean that you cannot get a mortgage, but it usually means that
obtaining the loan may be more difficult.
Not being able to obtain a home mortgage loan is one of the primary fears
of people considering bankruptcy. Luckily people searching for a bad credit
home equity loan will find that within one day after their bankruptcy discharge;
home loan financing companies, banks and other credit or loans companies will
consider them as credit worthy people. Within the mortgage industry lending to
borrowers with very bad credit including bankruptcy and foreclosure can go by
several names including bad credit mortgages , bad credit home mortgage loan,
second mortgage, bruised credit mortgage, b,c,d credit lending or simply bad credit
home loans. The positive side of this industry for debtors is the fact that
they can still obtain a mortgage for their home. On the other hand people with
bad credit must understand that standards and expectations for them in the
sub-prime mortgage market will have little resemblance to the type of home
mortgage loan available to a borrower with perfect credit.
If you are
person looking for a bad credit home equity loan you need to understand what
your position is before you go looking for a home mortgage. Below is some
general information to broaden your understanding.
Lenders categorize borrowers using two systems. The first mirrors standard
grades used in school. Borrowers' credit will be evaluated and given a grade,
where A is the best, B will be credit showing a bit of tarnish, C represents fairly
bad credit, D means very bad credit, occasionally I've even seen some F's. A
chart is included estimating where someone's credit will fit into this system.
Remember that people just like you and me evaluate most of these credit
reports, the result is that some credit evaluators will assign different grades
to the same borrowers and that some lenders may assign more or less importance
to certain types of negative items on a credit report.
Another type of scoring model more closely resembles an SAT or GMAT score,
with 800 being near perfect and 400 approaching as bad as it gets. These scores
carry names such as FICO or Beacon; each of these names corresponds to one of
the particular major credit reporting company. The mathematical formulas used
to calculate these scores remain proprietary information of the various credit
agencies; your information is then fed into a computer to determine your credit
score. The same negative items which would affect a letter grading system will also
negatively affect the numeric scoring system.
Loan to Value Ratio
The next important concept in calculating mortgage loan eligibility is the
ratio between the amount borrowed and value of the property placed as
collateral. The common name of this ratio is "loan-to-value" or LTV.
Examples include: A borrower qualifying for an 80% LTV loan and buying a
$100,000 house can obtain a loan for $80,000; refinancing a $200,000 house with
a 70% LTV would mean a $140,000 home mortgage. Borrowers should note that the
value used for calculations on new home purchases would in most cases be the
lower of the purchase price or the appraised value. With a house mortgage
refinance, if the home owner has been in the property for a long enough period
of time (usually at least six months to a year), the appraised value may be the
only value used in the loan to value calculation. This distinction can be a
problem in cases where a borrower has brought a home with a true market price
of $100,000 at an auction or through a power of sale for $60,000.00. The home
will appraise for $100,000 but the purchase price of $60,000.00 must be used
resulting to determine the LTV, this results lower amount of mortgage funds for
the purchase of the home. In this case the buyer will need to put down a higher
amount due to the LTV limitations. In budgeting for the purchase of a house do
not forget to include closing fees, legal fees and any taxes.
Calculate your debt to income ratio by adding together all of the your debt
payments, including not only the loan being applied for but also any other
outstanding loans such as auto loans, consumer debt, credit cards etc; divide
this number by your net after tax cash available each month. Most lenders would
prefer this ratio to be around 40% or less; in fact, to obtain certain low
interest mortgage loans a low DTI would be required. Lenders who deal in second
mortgages or private mortgages will allow more flexibility in the debt to
income ratio, allowing the percentage to climb as high as 60%.
Canadian mortgage lenders charge higher lenders fees and higher
interest rates to people who want bad credit financing. Loans to borrowers with
a poor credit history carry far more risk and the lenders require compensation
for this additional risk. Borrowers with a good credit history should not enter
into a mortgage loan agreement where they pay additional fees and rates based
on bad credit loan criteria.
While bad credit mortgage loans often leads to higher interest rates and
placement fees for anyone needing a loan, there are limits to the fee amounts
deemed proper in the mortgage industry. As indicated in the charts, people with
very good credit can pay little or no fees while those with a poor credit rating
may pay fees of 5% or more. For example a loan of only $20,000.00 with a
placement fee of 10% only represents a relatively small fee in terms of the
total dollars charged. In cases where a private mortgage lender has taken risks
well beyond even the standard sub-prime market, say over 80% LTV, the extra
fees make sense. Finding a mortgage loan broker or private mortgage lender to
do a difficult loan may take some extra work on the part of the borrower, but
with enough effort mortgage lenders can be found that will not only make the
loan but will treat the borrower fairly. Fees may bear many names like
"origination fees", "discount fees", "broker
fees", “placement fees” or "yield spread premium". Regardless of
what they are called there are two basic forms of fees. The first type I will refer
to here as "Upfront Fees". The borrower pays these points to either
the broker or the lender as compensation for creating the loan transaction. In
general fees represent the mortgage broker’s only source of income. They work
hard to make a loan come together and deserve to be paid.
The second type of fee is a "Back End Fee". The home mortgage lender
generally pays these fees to the mortgage broker. In some cases these fees
simply represent additional incentive from the lender to the broker to make a
particular loan. In other cases it represents a payment from the lender to the
broker as a reward for obtaining a loan with a higher interest rate. For
example a borrower may be able to obtain a loan at a 9% interest rate yet the mortgage
broker will only offer a 10% interest mortgage rate in order to receive a 1%
fee from the lender. In cases where a lender is merely trying to promote a
certain product by offering mortgage brokers a small reward through a back end
fee, for example one point or less, there may be little no or cost to the
consumer. There are cases where back end fees can be useful, especially in an
effort to save a house from foreclosure or power of sale, where funds are so
limited that closing fees can make the difference between keeping a house and
losing a house. By charging no up-front fees and allowing the mortgage broker
to be paid through back end fees it is possible for the broker to make his fair
amount of money on a loan and for the borrower to complete the loan transaction
with thousands of dollars less out of pocket expenses at the time of closing.
The borrower should be sure that they are aware of exactly what the fees are
for and when their credit has improved to refinance into a lower interest rate loan.
Another problem involves bad credit borrowers demanding unrealistically low
fees and interest rates from mortgage brokers and lenders. Bad credit loans
take a great deal more time than good credit loans and the risks taken by the
mortgage lenders are substantially higher. Borrowers with bad credit should not
expect to pay the mortgage interest rates and fees charged to borrowers with
good credit.
Excessive mortgage rate shopping can also lead to other problems; an
example could involve sending a mortgage application to 10 or 20 mortgage loan
brokers and can result in the mortgage broker not paying attention to your bad
credit mortgage application. Talking to a number of different bad credit mortgage
brokers to determine which one has the best ability to arrange your loan is one
thing. Pitting more than a few qualified mortgage brokers against each other
generally will not yield any significant difference in the mortgage interest
rate or the fees that you pay. Keep in mind that most mortgage brokers are
working on a commission basis and if they feel you are wasting their time they
will ignore you and move on to the next client. This can be especially true in
a bad credit home equity loan situation where each mortgage loan can be time
and labor intensive.
While the bad credit home equity loan market provides bad credit financing
to most people, it does not follow that everyone should take advantage of a bad
credit home loan refinance. Just because you can qualify for a first or second mortgage
does not mean that committing to a bad credit home loan mortgage and purchasing
a house would be a good financial decision. Postponing a bad credit home
purchase may allow the borrower some time to change the important variables;
primarily a delay can allow for the accumulation of a larger down payment. Not
only does a larger down payment result in smaller payments and better affordability
(because of the reduced loan balance) but a larger down payment also results in
a lower loan to value ratio translating to lower interest rates and lower fees
that the bad credit home loan lenders charge. In addition to using time to
gather the down payment the time passing in and of itself will help to repair
your damaged credit.
The best time to
acquire a bad credit home owner loan will be different for every individual.
Those who buy earlier have the option of refinancing their mortgage to obtain a
lower rate a year or two later. Personal cash flow issues may leave no option
available other than waiting for a better time. Taking on home mortgage
payments beyond your ability to pay may lead to yet another bankruptcy or
missed payments and in the credit rating industry a repeated credit failure
will be looked upon much more harshly. Many creditors are forgiving if a
basically creditworthy person had an isolated problem. Those people with a repeated
history of bad credit may be looked at as a habitual problem borrower or as a
person who fraudulently seeks credit without any intent to repay the debt.
Please note that the chart below is meant to act as a
general guide. Each credit agency and lending institution has its own set of
lending criteria.
