Does credit impact your down payment?
These are challenging times for many, leaving a number of future homeowners struggling financially. If you find yourselves dipping into your savings just to get by, chances are this will impact saving for a down payment. If your credit was poor before the pandemic and job cuts, or it has taken a hit due to the economic downturn, this can create some challenges if you’re trying to get approved for a mortgage. Here, we talk more about how poor credit can impact your down payment.
Understanding down payments
Earlier this month we talked about the ins and outs of down payments, which you can find here, and we are regularly talking about credit. These are two of the most common concerns of new home buyers when applying for a mortgage. It is important to understand down payments, and how credit is calculated. But, it is also important to understand how the two intersect.
As painful as it is, it may be appropriate to think back to grade 10 math. Remember correlations? Down payments are often negatively correlated with your credit score. This means that the lower your credit score, the higher your down payment may need to be. This makes sense. Your credit score determines your creditworthiness. Having a poor credit profile means, at least on paper, you are less likely to make your mortgage payments on time. Therefore, you have to prove your ability to take on the financial burden of a mortgage in other ways.
Usually, this comes in the form of a higher down payment. For borrowers with a poor credit history, a down payment of 20 per cent is often the magic number. This is also the minimum you can put down without needing to purchase mortgage default insurance. Even those with good credit might strive for a 20 per cent down payment or more for this very reason.
So, what can you do if you have a poor credit history but you don’t have 20 per cent to put down on a house?
Three key factors
The three key factors a lender will consider in your mortgage application are income, assets, and credit. We’ve been talking a lot about credit lately! If you would like a refresher, please read our recent post here. If you do not have a strong credit profile, your lender will look for strengths in the other categories.
Do you have assets you can use as collateral? If you own a vehicle, you could obtain a vehicle or title loan which will put the value of your property toward your loan. It is important to note that this might impact your debt service ratios. You should speak to a mortgage broker before taking out a loan. You can read more about debt service ratios here. If you already own property, you may be able to use the equity in your home as collateral.
Last, but not least, is income. If you have a high income and low debts, you will appear as a more attractive borrower. This is due in part to having the necessary funds available to make your mortgage payments. If you have a low credit score, but a decent income, a discerning lender might be able to tell that your poor credit score is a product of hard times, rather than poor financial habits. A recent uptick in repayment activity won’t automatically boost your credit, but it will speak to your ability to make your mortgage payments. Your credit score is not the entire mortgage application. If you can prove that you are a solid borrower, poor credit will impact your down payment less than it would otherwise. Lenders want to see the whole financial picture.
It starts with an unbiased mortgage professional
Now that we have discussed the relationship between credit and your down payment and other factors used to determine your ability to obtain a mortgage, let’s talk about how a mortgage broker can help you.
The majority of traditional banks in Canada simply will not lend to you if your credit score is less than 600. However, this is not true of private lenders and alternative lenders. These lenders are often difficult to navigate, and some mortgages are not available to the public. This is where your mortgage broker comes in. A mortgage broker is well acquainted with a wide range of lenders and has seen every type of borrower you can imagine. This means that they can get the best deal for you and your situation because they have seen it before!
Your mortgage broker will review your credit, your down payment, any collateral, and your debt-to-income ratios and will pursue the right lender for you. There are some cases where it may not be the right time for you to get a mortgage. An unbiased mortgage broker will set you up with a realistic plan to get approved for a mortgage. Additionally, they can coach you on correcting your finances. This will increase your chances of becoming a homeowner in the future!
If you’re unable to save a large down payment, and you have a poor credit history, there is still hope! If you are looking to buy a home, and have some concerns about your credit, give me a call at (705) 333-4338 or get in touch with me here!