Ron Alphonso is the principle mortgage broker at Mortgage Broker Store, a mortgage company based in Toronto, but operating across Ontario, specializing in powers of sale, foreclosures and real estate litigation. They help people stop these events from happening and get on with their lives.
Bad credit is part of that and like a realtor, they can help match those with bad credit to homes that they might realistically have a shot at buying if the stars align in the correct way. Ron says they handle more real estate problems than most realtors in the province do, which is why they were selected to answer this week's question.
If I want to buy a home but I have bad credit, what are my options?
You should first visit a mortgage broker and determine what you can get in actual dollars. Depending on where in the province you are, our company's process is to refer you to a realtor in your general area. At that point, we can tell the realtor, with full disclosure from the client, here's how much they can afford, here's the range and here's what you can be looking for. Let's say the client can afford a $300,000 house and they're putting down 25 per cent. It's after seeing us and being pointed to the correct properties and working with the correct realtor that they can actually afford the home.
When you have bad credit and want to buy a home there are two scenarios: the first is the scenario above where the client contacts us first and determines how much money they can get and then we'll give them the actual numbers and tell them, “You can actually get this mortgage and we can arrange this for you in this manner.” In that case, the deal will run smoothly.
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The second scenario is the nightmare scenario of the real estate agents who really don't know anything and I don't have a lot of faith in a lot of real estate agents out there. A standard phone call we get from people is, “I bought a house, put down $20,000 or $30,000, my real estate agent said I could close the deal and now the bank has denied the mortgage and I'm in the position of losing $20,000 to $30,000 dollars.”
We get that all the time where they believe the real estate agent, they have bad credit, they didn't get the mortgage properly qualified and, in the end, they lose the money.
If you have bad credit and want to buy a home, the first thing you should do is contact a real estate agent or a mortgage broker – a company like ours. Our company's specialization is difficult mortgages, so at any given time, we actually have people that want to sell houses and you could actually give us a call and if the stars align, you can actually buy one of these homes without any real estate fees at a lower price.
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One way to buy a home with bad credit is, let's say you have the downpayment required but your credit score isn't good enough. You can get a co-signer who will sign for one per cent of the house, but now that their name is on the title, their credit score is used and not your bad credit score. The only problem with that is the person who is putting their name [on the mortgage] is on for all the debt as well.
Don't forget the lower the loan to value, the easier it is to get a mortgage. A broker like ours can do a first and a second mortgage. Let's say you arrange a lower interest rate with the first mortgage, but you still don't have enough downpayment, then we'll take a smaller second mortgage. For example, the first mortgage might be $200,000 and the second mortgage might be $30,000 or $40,000. You can also do that.
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With bad credit, the real problem is that you're going to be charged a higher interest rate. The most important thing is to think about is your mortgage and to set it up properly to achieve the lowest interest rate possible.
If we do the first and second mortgage situation, the first would come at the bank rate of three per cent, the second would come in at 10 per cent. But, because the second mortgage is less than 10 per cent of the first, if you take the combined average, it's only three per cent. If you just took a high ratio, like an 80 per cent first mortgage, you will be paying seven to eight per cent.
