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Here’s How Bad Credit Can Affect Your Mortgage

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A woman reads over her credit card statements in this stock photo. A credit score above 680 is considered good for your financial health.

You probably already know that your credit score is an important part of your financial health. But did you know that it’s one of the most important factors in qualifying for the best mortgage rates on the market?

So, how does your credit score affect the mortgage rate you can get? Can you still buy a home with poor credit? Here’s everything you need to know.

What is a credit score?

Your credit score is a number, generally between 300 and 900, that indicates how likely you are to make repayments on your loans (in other words, your overall credit-worthiness). A higher score shows that you have been diligent about making repayments in the past and are therefore less likely to default. This makes companies more inclined to lend to you.

So what counts as a “good” credit score? A score above 680 is considered good, 600 to 679 is fair, while a score under 599 is often considered poor.

TransUnion and Equifax are the two companies that track credit scores in Canada. Every time you borrow or make a repayment on a credit card, car loan, mortgage, or any other type of credit account, these companies add these activities to your credit history. Your credit score is then derived from your credit history.

Here’s a breakdown of how credit scores are generally calculated:

  • Payment history (35%): How often you make your payments on time. Any bankruptcies and delinquencies will have a negative impact on your payment history.
  • Amounts owed (30%): The outstanding balances you have on any of your accounts as well as how much of your available credit you actually use. A good rule of thumb is to use only 30% of your available credit.
  • Credit history (15%): How long you’ve maintained your credit accounts and how often you use them.
  • Credit mix (10%): Types of credit accounts you currently maintain and how many you have of each.
  • New credit (10%): How many credit accounts you’ve opened recently. Too many applications for new credit accounts can lower your score.

Several companies offer free credit score checks, which can help you understand your current financial standing and how you can improve your credit score. Just remember that these services won’t always give you the same number that your mortgage provider uses, as there are many different methods for calculating your score.

How your credit score impacts your mortgage rate

To understand how bad credit affects mortgage rates, it helps to think like a mortgage lender. Lending to someone with poor credit is risky, as they’re more likely to not make their payments on time or default completely. To compensate for the extra risk, lenders agree to issue mortgages with higher rates to people with lower credit scores.

If your credit score is below 600, most of the major banks in Canada will not approve you for a mortgage. Instead, you may have to use a “B lender” or even a private lender. Lenders such as these have mortgage products specifically for people with low credit scores.

Watch: These are the best credit cards to have during a financial pinch. Story continues below. 

 

Here’s how your mortgage rates might look in three different credit score ranges:

680 or higher: With good to excellent credit, you should be able to qualify for some of the best mortgage rates available with all of the major mortgage lenders. While other eligibility criteria such as employment status, down payment size, and home purchase price could limit your options, your credit score will not do so. Note that some of the lowest mortgage rates available are promotional rates, which oftentimes come with a minimum credit score criteria of 680 or higher.

600 to 679: With fair credit, you should be able to get a mortgage from many providers, though some lenders with strict requirements may still reject your application. Others might lend to you but may offer you a higher mortgage rate than one that you could get with a better credit score. If your score is at the lower end of the range, lenders will evaluate why your score is low and take that into consideration when they make their decision.

Below 599: With a poor credit score, you might find it hard to get a mortgage from a top-tier lender. If that’s the case, you could be forced to borrow from a “B lender” that specializes in mortgages for people with poor credit. These “subprime” mortgages come with much higher rates than those available from the major banks and financial institutions.

A higher mortgage rate can make a big difference in the amount of interest you pay. Let’s take a $500,000 mortgage with a 25-year amortization period as an example. With a rate of 1.99%, you’d pay $45,654 in interest over a 5-year term. With a mortgage rate of 3.99%, you’d pay $92,837 in interest over the same 5-year term — more than twice as much! Use a mortgage payment calculator to run your own numbers.

Tips for getting a mortgage with bad credit

If you have bad credit but want to get a mortgage, don’t despair completely. While a low credit score makes it harder to get a great rate, there are straightforward steps you can take to get yourself on track towards owning a home.

Improve your credit score: If you can afford to wait a little longer before buying a home, you can work to improve your credit score before you apply for a mortgage. Making repayments on time, keeping credit cards and accounts in good standing, and limiting your usage of available credit limit can all help increase your score.

Consider a co-signer or joint mortgage: If your credit isn’t high enough to secure a great mortgage rate, adding another applicant with a good credit score may help. Joint and co-signed mortgages are approved based on the financial situation of both applicants, which could score you a better mortgage rate than you could get on your own.

Save for a larger down payment: A big down payment can signal that you are financially stable. Remember that your credit score is not the only criteria that lenders use to evaluate your application. If you have stable employment, a high income, low overall debt levels, and a large down payment, lenders may look at your application favourably. A large down payment also helps offset the cost of a higher mortgage rate. The larger your down payment, the less you’ll need to borrow, resulting in significant savings. Furthermore, a larger down payment will also increase how much house you can afford — use a mortgage affordability calculator to better understand this.

Work towards your next renewal: Getting a less-than-ideal mortgage today doesn’t stop you from getting a better one in the future. You’ll have a chance to requalify for a new mortgage with a different lender when you renew. If your credit score has improved by your renewal date, you may be able to qualify for a better rate then.

The bottom line

Having a good credit score is critical when you’re looking to borrow money. Because a mortgage is the biggest loan you’re ever likely to take out, it’s essential to consider the effect that your credit score can have on your mortgage application.

If you’re able to take the time to increase your credit score to 680 or higher before you apply for a mortgage, you’ll give yourself more options, and a better chance of getting a great mortgage rate.

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Bad Credit

Beware of Spot Deliveries! | Auto Credit Express

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A spot delivery is often considered a scam technique that some dealers use to get you to take delivery of a car immediately after you agree to a deal. However, just because you agreed to a deal verbally and put some cash down doesn’t mean that things can’t change or that the vehicle is yours to keep.

Spotting Spot Delivery Scams

Beware of Spot Deliveries!Spot deliveries, also called yo-yo financing, simply means that you drive off with the car before the financing process is done. This is problematic because you can sometimes drive home with a vehicle, only to get a call later that your auto loan application was rejected.

Once you get that call that your financing didn’t go through, one of two things tend to happen next:

  1. You have to draw up a new contract with the lender, typically with different terms than you originally agreed to.
  2. If you don’t want the new terms or can’t afford the payments, you’re forced to return the car.

This can be an emotional rollercoaster, and it’s extremely inconvenient. You get to drive off with your next vehicle, elated that you were tentatively approved, only to find out that you must return to the dealership to start the process over again.

Often, bad credit borrowers can be victims of a spot delivery scam. Once they hear they can take the car home, it feels like a done deal and that everything is sorted. When you’re struggling to get an auto loan approval, some borrowers take what they can get if they need a vehicle quickly.

This is the yo-yo part – going back and forth between an approval and a denial, and from home back to the dealer until something can be finalized.

Avoiding a spot delivery scam is simple: just don’t drive off with the car until all of the necessary paperwork is completed and finalized. This means verifying that you’ve signed the title, the financing documents, and the sales contract. Don’t put any money down on a vehicle until your financing is approved, and don’t drive away from the dealership with any documents left unsigned.

Additionally, bad credit borrowers can explore other financing options if they’re struggling to get an auto loan approval.

Trouble Getting an Auto Loan?

If you’ve had issues finding a lender that can work with your credit, consider special financing. Special financing dealers are signed up with subprime auto lenders that are equipped to handle all sorts of unique credit situations like a past repo, bankruptcy, or poor credit. Instead of basing their loan decision on credit score alone, they examine the many parts of your financial health to determine your ability to take on a car loan.

After you submit your items to a special finance dealership, they’re sent off to one or more subprime lenders that see if you’re ready for an auto loan. Based on your income and overall stability, subprime lenders tailor a car loan (if you qualify) to your situation.

This means approving you for a monthly payment that fits your budget, also called a payment call. Subprime lenders see if you qualify before you pick a vehicle – not afterward. The financing process is done before you take a car home, unlike a spot delivery.

Subprime lenders also report their auto loans to the credit reporting agencies, giving you the chance for credit repair. With an improved credit score, you can have more options for new credit, and hopefully qualify for a better interest rate and possibly a higher loan amount on future car deals. Getting out of bad credit should be a priority, since it can determine so much of your vehicle buying power.

Finding the Right Car Loan

Instead of hoping to run into a dealer that has bad credit lending resources, start with us at Auto Credit Express. We know where special financing dealerships are, and we match bad credit borrowers to them daily.

To get connected to a dealer in your area, fill out our auto loan request form. It’s completely free, secure, and carries no obligation. Get started now!

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Bad credit rating: How you get it, how it affects you and how to clear it

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Finance expert Lacey Filipich explains what you need to know if you have a bad credit score – including how you get one, how it affects future loans, and how to clear it.

As our options for accessing debt have expanded (I’m looking at you Buy Now Pay Later,) Australian consumers have gotten savvier about credit ratings affecting their finances.

Some of you may even have had your credit rating pronounced ‘bad’.

If you haven’t thought about your rating before, this might feel like getting a big fat ‘F’ on your school report card for a subject you didn’t even know you were taking.

If this bad credit rating is affecting whether you can get something you need – for example, a mortgage – what can you do to fix it?

First, let’s start with where that rating comes from.

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How your credit rating works

The credit rating system is a regulated shortcut. Lenders can see at a glance via your score whether you’re a good bet financially. It’s not the only thing they look at, but it’s part of the mix in assessing you as a customer.

Keep in mind that a lender is anyone who might send you a bill. Even a gas bill paid at the end of the usage period is like credit, right? They’re advancing you a service or product. Whether you pay them, on time and in full, is a reflection on how you treat debt.

Over time, your behaviour with debt generates your aggregated score.

Your rating depends on:

  • What kinds of debt you’ve used before.
  • Whether you’ve paid back those debts on time.
  • Whether you defaulted on any bills or repayments, meaning you haven’t paid by the agreed date and/or to the agreed amount (time and dollar value limits apply).
  • Applications you’ve made for credit elsewhere.
  • Whether you’ve been bankrupt, or had to negotiate an agreement to change how you repay a debt through legal channels.
  • How many requests there have been for your credit report from other credit providers.

Actions perceived as positive, such as paying your debts in full and on time, improve your credit rating.

Actions perceived as negative, such as missing payments or defaulting or a lot of credit checks, reduce your credit rating.

And it doesn’t matter what you bought with the debt. Credit ratings don’t reflect the value of the asset that debt paid for.

RELATED: 7 essential money hacks for first time parents

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What is a ‘bad’ rating, and how do you get one?

There are three main credit reporting agencies in Australia: Equifax, Experian and Illion.

Just to make things difficult, they use different scales (0 to 1000 or 1200) and different cut-offs to define ‘good’ and ‘bad’. Thanks *so* much, guys.

With Equifax, ‘bad’ is 505 or below. For Experian, it’s 549 or below. And with Illion, it’s 299 or below.

Because credit ratings are based on rolling information – generally five to seven years’ worth of your monthly behaviours with debt – they can change a lot.

If you repeatedly pay bills late, or you default on debts you’ve agreed to, or you apply for lots of different forms of credit, your rating drops.

You might also have an adverse impact from something that you’d consider unfair or wrong appearing on your credit report.

RELATED: Home loans: Is fixed or variable the best option?

Can you fix your credit rating if it’s bad?

If your application for a loan has been knocked back due to a bad credit rating, it’s a good idea to check your report via one of those three agencies.

Mistakes can happen. Incorrect names or erroneous account details might mean you’ve been attributed to actions that belong to someone else.

Intentional fraud can also happen. If someone steals your identity and starts racking up debt against your name, you want to get that sorted quickly.

There may also be notes on your file that you consider unfair. Perhaps the lender didn’t notify you properly, or listed a default while you were disputing the charge (which they shouldn’t).

To fix errors or unfair items, you can request amendments. You’ll get a positive impact on your credit rating quickly this way.

Sometimes, a poor credit rating is just like the impact of poor diet or no exercise. It’s real, and it’s down to your behaviour.

And just like diet and exercise, quick fixes aren’t usually effective. It’s about consistent, positive debt behaviours. Over time, these little steps add up to an improved credit rating.

Firstly, Pay. Your. Debts. On. Time. All your debts – utility bills, credit cards, mortgages etc.

If you can’t make your payments, speak to your lender proactively so you can agree a mutually satisfactory arrangement. That means you don’t get a strike against you with the credit agencies. Consider talking to a financial counsellor if you’re using debt to cover basics, as that’s is not a good place to be.

Secondly, use debt judiciously. Don’t apply for any and every credit card. Keep your credit card limits to a reasonable minimum.

Finally, channel the old Pantene mantra: it won’t happen overnight, but a good credit rating will happen (if your behaviours are positive).

Be patient and sensible, and you’ll get there.

Lacey is the founder of Money School and Maker Kids Club, where she shares lots of ideas and tips on the whole family being smarter with their earnings. 

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What Does an Extended Car Warranty Cover?

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If you purchased a brand-new car, then you’re covered under the manufacturer’s warranty until a certain mileage point or age limit. What happens after you’ve met these limits? For those who want extra coverage on their vehicles, extended warranties can be an option for used cars.

Understanding Extended Warranties

What Does an Extended Car Warranty Actually Cover?If something happens to your vehicle that your insurance company doesn’t cover and the car’s manufacturer warranty is expired, you’re left to foot the cost of repairs. For this reason, many borrowers consider buying an extended warranty for their used vehicles.

An extended warranty, also called a vehicle service contract, is essentially additional coverage on your car, and the name is somewhat inaccurate. Extended warranties don’t “extend” the original warranty offered by the manufacturer. They’re actually third-party service contracts that cover certain vehicle repairs for a set amount of time and/or mileage.

For those who rely on their cars heavily day-to-day, service contracts can offer some peace of mind when you’re driving a used vehicle. Extended warranty coverage varies greatly, and no two offered by dealerships are likely to be the same.

To see what an extended warranty truly covers, ask for a list of the inclusions and exclusions from the finance and insurance (F&I) manager at the dealer where you’re purchasing your used car.

What Vehicle Service Contracts May Cover

Many service contracts can mimic the manufacturer’s original warranty. Some cover the transmission and engine, and associated parts of these two key systems like seals and gaskets. Some extended warranties can cover most parts of your vehicle, including the key components (like the engine and transmission) and things like air conditioning and maybe even the power seats.

As a good rule of thumb, these things typically aren’t covered under extended warranties:

  • Regular maintenance
  • Brakes, clutches, windshield wipers, and lights
  • Regular wear and tear (like interior damage)
  • Body damage (dents)
  • Modifications
  • Tires

Keep in mind that most extended warranty claims come with deductibles, and there tend to be rules and exclusions that don’t come with a manufacturer’s warranty. Often, the dealership where you purchased the car and service contract requires that you go to their service center to repair your vehicle under the warranty.

On top of that, some extended warranties require that you pay for the repairs up front and then file a claim to be reimbursed for the cost later. Be sure to read all the fine print of a service contract, and feel free to ask lots of questions. You’re the one spending the money on it, after all!

When to Buy an Extended Warranty

Manufacturer warranties can last for a number or years, or up to a certain mileage. New cars often come with bumper-to-bumper coverage for around three years or 36,000 miles, as well as a powertrain warranty that’s normally good for around 10 years or 100,00 miles.

If you’re purchasing a used vehicle, check to see if it’s still covered under its manufacturer warranty before you consider buying an extended warranty.

In most cases, if the car you’re purchasing is outside of the original new vehicle warranty, the F&I manager offers you a service contract when you’re wrapping up your contract. F&I managers typically have a whole menu of options that you can consider adding to your auto loan.

Before you decide on an extended warranty, or any of the dealer add-ons available, make sure to ask questions about the contracts offered and the details about what they cover. If you decide to take one, the costs are usually then rolled right into your car loan payment.

Ready to Start Car Shopping?

When you’re buying a used vehicle, there’s a higher risk of something going wrong with it down the line. This is always a possibility with any car you’re fixing to buy, but with a used one, it can be hard to tell what the vehicle has truly been through. It’s even harder to predict what could happen in the future.

Extended warranties and cars can be long-term commitments, and it can feel like a hassle to find the right dealership for your situation. When you have less than perfect credit, finding the dealer that’s signed up the right lenders can be even more difficult, but it doesn’t have to be!

Here at Auto Credit Express, we’ve cultivated a network of dealerships that work with bad credit borrowers. Instead of driving all over town and hoping to find a dealer for your credit, fill out our free auto loan request form, and we’ll do the looking for you. We’ll search for a dealership in your local area that has the lending resources you need.

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