Getting a mortgage with a low credit score can be a challenge. There are some options available, but it ultimately boils down to how much down payment you have.
Minimum Credit (FICO) Score Requirements
The lowest credit score required to access competitively priced mortgage financing is a credit score of 600. More recently, the market has seen this level increasing to 650 or 680 depending on the lender. With a FICO score less than 600, an alternative/private lender are the only options.
Equity/Down payment Requirements
You may have heard the adage “cash is king.” The same applies to obtaining a mortgage with a low credit score. With a credit score of less than 600 you will need a minimum of 20% down payment for a purchase or 20% equity in your home for a refinance. These minimum requirements will depend on property type and location. In the alternative lending space, there is a greater emphasis on property “marketability.” Therefore, rural properties without municipal services (i.e., well and septic) become a constraint on accessing a larger pool of potential lenders as they typically have longer days on market when it comes time to sell.
In addition to the down payment requirement, lender and broker fees will apply. The extent of these additional fees varies so it is best to work with a Mortgage Broker that has access to a developed alternative lend sources.
One strategy that might be considered is getting a co-signer or guarantor with excellent credit and personal net worth to strengthen the overall deal. Typically, immediate family members are used (i.e., parents and siblings). This is highly dependant on the merit/strength of the individual file and will be reviewed by the lender on a case-by-case basis. Again, it is best to work with a Mortgage Broker who has experience with the alternative lending space.
Purchasing a property through a rent-to-own program can be an excellent way to purchase a property while you are building your credit score. There are several ways this can work. Here are the two most popular approaches:
- Work directly with a rent-to-own company.
- Work with a Mortgage Broker who has clients that will consider purchasing the property on your behalf.
Regardless of your approach, a deposit and fees will apply. There is no standard in the industry, so it is best to look for options that meet your current budget. With a rent-to-own program, a portion of your monthly payment goes towards rent and the remainder goes towards the down payment on the future agreed upon purchase price. These agreements normally last three-years. Here are a few must-have items for your rent-to-own contract:
- Full executed with all parties’ signatures.
- Monthly rent payment.
- Monthly “to-own” payment.
- Schedule of payments detailing “to-own” accumulated funds.
- Agreed upon purchase price.
- Duration of agreement including future purchase date.
It is imperative that a contract with a schedule of payments be obtained at the start of the agreement as there are some lenders who will recognize the accumulation of down payment funds when applying for your future mortgage.
When planning to purchase or refinance, there are lots of great online resources available. Check out our great mortgage calculator to help you understand your potential maximum purchase price. Please download our My Mortgage Planner app. It has tons of useful information from land transfer tax estimators to online pre-approvals. If you’d like help or more information please email us at info@TheMortgageGuyNiagara.com or book a no obligation consultation.