Financing is arguably the most complex and stressful aspect of buying a house. Unless you’re fortunate enough to have the funds readily available, you need to be able to qualify for a loan of some kind. And with the average price of a house hovering just under $1 million, not many people find themselves in the position to buy with cash.
What are your options if your credit rating is spotty at best? Or does a spell of back luck or past mistakes mean you’ll be stuck in the rental market forever? Let’s take a look at what credit scores actually mean and the possibilities that are open to you.
Understanding Your Ranking
In Canada, your credit rating is ranked based on a number between 300 and 900. The higher the number, the better your credit and the more likely banks will be willing to approve your loan. Every lender interprets the data differently, but in general, anything under 599 represents a poor credit score. Anything over 680 is considered good, and everything in between indicates a fair rating.
Hard Credit Checks
You may hear the terms hard and soft credit checks. A hard check occurs whenever a financial institution looks closely at your credit history when deciding to approve you for a loan or credit card. Whenever you pull a hard credit check for a large purchase, your rating can go down. However, according to Equifax, the effect of hard credit checks are usually minimal, especially compared to the benefits of finding a mortgage with the lowest interest rate possible. Hard checks can have a negligible effect as long as you are not applying for multiple loans.
When making a large purchase like a house, you can usually apply for several mortgages within 45 days without it affecting your credit rating every time. This gives you time to shop around for the best rate.
Soft Credit Checks
A soft credit check is when you or a company look at your credit without the purpose of approving a loan. When you receive one of those preauthorized credit card offers in the mail, you can bet the company first pulled a soft check to see how well you manage your debts.
Looking at your own history is also considered a soft check. These do not impact your score, so you are free to review your status as often as you want.
Did you know that buying a home can actually be less expensive than renting? Here is some interesting food for thought:
- Is it Time to Leave the Guelph Rental Market Behind?
- Seven Reasons Why This Could Be Your Best Opportunity to Buy a Home in Guelph & the Tri-Cities
- Can You Time the Market and Win Big?
Creative Options for Buying a House With Damaged Credit
Contrary to popular belief, having damaged credit doesn’t automatically disqualify you from buying a house. With a little creativity and out-of-the-box thinking, you may be surprised at what options are available to you. Here are some paths that could lead you to homeownership sooner than you think:
- Talk to a mortgage broker. Unlike the bank, mortgage brokers represent dozens of lenders. Many private or subprime companies will approve your mortgage even with less-than-stellar credit.
- Have someone cosign for your loan. Not everyone will be willing or able to take the risk of cosigning for you. However, your parents or other close relatives will often help you if they can. Getting you into your first home is one of the best ways to help you become financially independent, which is a risk a loved one may take if you’re committed to the process. However, keep in mind the lender may require your cosigner’s name to be on the deed.
- Save for a larger down payment. A lender is more likely to approve a smaller loan than a large one. It’s just one more reason it makes sense to pay as much as you can upfront. You’ll also save on interest rates. And if your down payment is 20% or more, you won’t have to buy mandatory mortgage insurance.
- Buy as a group. If you have investment-minded friends or relatives, they may help you with your purchase in exchange for part ownership of the home. You won’t own your property outright, but it’s still a way to get into the market and start building your equity.
Is it ever smart to buy property in an uncertain economy? We think so. Find out more in our previous articles.
- Could Buying During A Recession Be A Genius Investment?
- Is Now A Good Time To Buy An Investment Property In Guelph?
- Will A Shifting Market Help Millennial Buyers?
Tips for Improving Your Credit Score
It may be possible to buy a house with poor credit. However, you may find yourself stuck with a high-interest rate that adds to the cost of your purchase very quickly. That’s why the best long-term solution is to work to repair your rating.
Improving your score won’t just make it easier to get approved for a mortgage. It will help get you better terms and the lowest possible interest rate. Fixing poor credit will take time, but there are very clear guidelines to keep you on track.
Keep your longest-running accounts. Even if you don’t use your oldest accounts, keeping them active helps to show a longer credit history, which is always looked on favourably by lenders.
- Pay all bills on time. A hectic lifestyle can make it challenging to remember to pay everything on time. If your credit is good, being a day or two late may not hurt very much. But if you’re trying to rebuild poor credit, it’s a good idea to get into the habit of paying all of your bills a little early. Most online banking apps allow you to set up automatic payments, reducing the possibility of something slipping through the cracks.
- Think twice before opening new credit cards. Hard checks can lower your rating, but that’s not the only reason to consider keeping new accounts to a minimum. Having too much open credit can be seen as a liability and hurt your credit score.
- Stay below your limits. Most lenders will view maxed-out credit cards as either a sign of financial distress or that you’re not being responsible with your money. Try to keep your balances to a maximum of 30% of the limit. This shows that you make financial decisions wisely and can make your payments with ease.
Let Go of the Shame
Fair or not, a poor credit rating often comes with feelings of shame or embarrassment. All too often, we are our own worst critics. Most of these judgments are overly harsh and often unfair.
Your credit rating can take a hit for any number of reasons, and many of them are not your fault. An illness, job loss, divorce, or other circumstance can cause financial distress that can follow you around for years. It can happen to anyone, even the wealthy!
Removing the shame and stigma can help us all have honest discussions about debt, money, and investments. When you feel free to talk about your situation and reach out for help, you’re well on your way to a more successful future.
Buying a home is a different experience depending on your life’s circumstances. But whether you’re looking to make your first purchase or you’re newly single and starting over, we have a guide that can help you. See all of our buying guides right here.
