How To: Get a mortgage with not-so-perfect credit/income

I've been turned away from the bank, what do I do? 

You're not the only one. 

According to Statistics Canada, millennials (born between 1981-1996) are more educated and possess more assets compared to any other generation group however, they are ones with the most debt. 

Since this is the case, the Government of Canada has introduced a handful of programs that cater to first-time home buyers who are within the millennial generation. However since there is an overwhelming amount of debt that lingers over the heads of thousands of Canadians, some do not seem to qualify because of their imperfect credit history.

Despite the popular opinion that millennials are to blame for the downturn of the economy, they are suffering under the same consequences that most young Canadians are put through including student loans, low-income jobs, overpriced consumer items, little to no access to health/dental benefits, etc.

So what do you do if you have a history of credit/little income issues and you're wanting to buy a mortgage? Let's look at a private mortgage.

Skip the Bank, Go Private

A traditional bank will turn down an applicant looking for a home loan who doesn't have the ideal credit profile they are looking for. Mortgages in Canada are difficult to sell to younger people because of the pre-existing idea that you need an exceptional credit score and a clean financial background.

This is where a private lender comes into play.

A private lender can be in the form of an actual institution or an independent investor. Instead of looking solely at a borrower's credit profile, they will assess the property value as well as how attractive it looks on the market.

Private lenders will offer you a private mortgage. A private mortgage is a short-term loan that offers interest-only payments. This type of loan is perfectly suited for applicants with the following situations:

  • They are being turned away by traditional mortgage lenders because of a poor credit history or inconsistent income
  • They are wanting access to their home equity
  • They are wanting to commit to a mortgage that isn't long-term
  • They have their eye set on buying a property that is unconventional and would not be approved by a regular lender

Pro's & Con's of a Private Mortgage

PROS:

Short Term: The loan will last to a maximum amount of three years. It's a great choice for someone not looking to settle down for a long period of time.

Fast Financing: After submitting and getting your application approved, you will usually see funds in about 2-3 weeks.

Time for repair: Utilize the short length of time you have in your private mortgage to work with a credit consult/repair agency or find a more consistent job that pays a bit more compared to what you're currently making. 

CONS:

No guarantee of renewal: There is not a 100% guarantee you will be able to renew after your term is up. If you keep up with payments and avoid extra charges, you will evidently show your lender that you're capable of renewing.

Market fluctuation: Since credit isn't the main consideration of your loan, a private lender will base their interest on the property's value in case the buyer defaults their payments. This means if the housing market falls and the value of your Home drops during your loan, you may have to cough up more money in order to secure a renewal.

Much higher rates: Your lender is essentially taking a risk working with you because of your 'neutral' credit score or your inconsistent income. As a result, there will be an increased interest rate on your monthly payments in comparison to other traditional mortgages.

How do you calculate a private mortgage?

Here's an example of how a private mortgage would work for you.

Let's say you want to borrow $500,000 to buy a property however, you were turned away from your financial institution.

You find a private lender to work with who decides to lend you the funds through your own private mortgage.

You will borrow the entire $500,000 at a 10% interest rate over a 2-year amortization period.

Your monthly interest is determined by your 10% interest rate divided by 100 to get a value of (0.1). You take this 0.1 value and divide it by the number of months in a year (12). This will determine your monthly interest amount = 0.00833.

  • 10 / 100 = 0.1
  • 0.1 / 12 = 0.00833

With the 0.00833 value, you want to multiple this value by the amount you are borrowing from your lender (500,000). This will determine your monthly payment amount = $4,165.

  • 0.00833 X 500,000 = 4,165

The 4,165 value is now multiplied by your 2-year amortization period in months (24). This will determine the amount of interest incurred throughout your term = $99,960.

  • 4,165 X 24 = 99,960

At the end of the 2-year term, you will be paying your private lender just under $100,000 in interest. If you're able to, transfer the $500,000 private mortgage to a regular lender so you can start paying off the principal amount. 

Any other associated costs such as a broker commission or initial start-up fees would be included in the $500,000 borrowed loan.

How do I find a private lender?

Consulting with your local mortgage broker will make finding the private lender for you a much easier process. Since brokers work very closely with lenders, they will most likely have several recommendations for you to start with.

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If you're interested in pursuing a private mortgage for your first or next Home please connect with HomeHow Mortgage for an absolutely free consultation. You can call, text, or send us a message on our website. We encourage any question you have about finding you the best mortgage while under a private lender. 

HomeHow Mortgage.