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Mortgages for the Masses (with Bad Credit)

April 11, 2012
3 mins
A young couple meet with a representative to buy a home

The self-employed (including small business owners) have always had a hard time getting mortgages. If you’re using a good accountant – which every self-employed person should – you could have a significant amount of legitimate write-offs that bring your taxable income down to a fraction of what you truly make. Yet most financial institutions use that figure as their starting point to determine how much they’re willing to loan you. Run up some bad debt on a failed earlier business and…good luck.

And pity those who’ve gone through a divorce, which can hurt in countless ways. A friend recently revealed that when she first separated from her husband, she had no credit rating. She either wasn’t on or had been listed as the secondary account holder on all their bills and credit cards. Her soon-to-be-ex blocked her from “his” credit cards and the most she could qualify for on her own was a low interest balance transfer card.

What to do When you Don't Qualify for a Mortgage

The lessons here are A) If you can, try to not get divorced and B) even if you’re the happiest married couple on earth, both partners should have some credit rating – and access to key assets. After all, odds are that one of you will die before the other. But enough doom and gloom.

Here are a few other suggestions to help you secure a home loan.

Use a Mortgage Broker

Even if you’re the proud owner of a triple-A credit rating, you can benefit from the professional expertise of a mortgage broker. So if you have even the slightest concern about qualifying for a mortgage, a call to a broker should be your first move. They work with clients from all walks of life on a daily basis and, more significantly, work with dozens of different financial institutions.

In years’ past, the big banks oddly enough, couldn’t seem to understand the unique situation all their small business clients were in. Thankfully, things have changed. CIBC has a Self-Employed Recognition Mortgage, for example, that’s based on an applicant’s personal credit history, rather than their business’s credit. Similarly, RBC’s Self Employed Mortgage targets people with “a good credit history who have been in business for less than 3 years” and offers them the their standard posted rates.

Use an Alternative Lender

If it’s a bad (or no) credit situation you’re in, you’ll likely have to turn to alternative lenders. Don’t worry, we’re not going to send you to the local loan shark.

Also known as B-lenders or second-tier financing, the options available can range from a private mortgage held by the person you buy your home from to a subsidiary of the very same Big Bank that turned you down. The downside is that you may have to pay five or even ten percent above the going prime rate in interest. The upside is that you’ll be able to start building equity in your home – instead of paying rent – and, provided you make all your payments on time, when the mortgage comes up for renewal, you’ll be on solid footing to qualify for a traditional mortgage and competitive rates.

Still Declined?

Even if you do find yourself denied by all parties – or are reluctant to sign on for a mortgage at 15 percent – all is not lost. Spend the next few years building up your credit score (by paying all your bills on time, for starters) and, at the same time, build the balance you’ll have available for a down payment so your ready to purchase when the time comes.

Allan Britnell

Toronto-based freelancer Allan Britnell is an award-winning writer with nearly 20 years’ experience. He covers a diverse range of topics, including DIY and professional home renovation projects, nature and the environment, small business, personal finance, and family and health issues. He is also the managing editor of Renovation Contractor, the publication written for small- and medium-sized contracting and custom home building companies. He lives in Toronto with his wife, two daughters, and their dog, Oscar.

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