Don’t give up on your dreams of buying a house just because you have less-than-perfect credit. A low credit score — or even bankruptcy — doesn’t preclude anyone from getting a mortgage, thanks in no small part to Canada’s competitive mortgage industry. The key is in knowing how to rebuild your credit before you take the plunge into home-ownership. Follow these steps and you’ll be well on your way to purchasing a new home.
Analyze Your Credit Report
If there are any obvious errors on your credit report, send the credit bureau a dispute resolution form (included in the credit report they sent you) to correct the issue. This can take up to two months, so plan accordingly.
With your credit report in hand, you can decide whether your credit requires some tweaks to improve it, or if major surgery is required. If your credit is very bad due to high debts, a consumer proposal or bankruptcy may be required to eliminate your debt. Generally mortgage lenders want you to have completed your proposal or bankruptcy for at least two years before they will consider lending to you at favorable rates, so the sooner you take action, the better.
NOTE: Don’t dismiss bankruptcy or proposal as an option because you think it will hurt your chances of being approved for a mortgage down the road. If your credit is so bad that you can’t borrow anyway, there is no downside to taking action, and ultimately you’ll be better positioned to buy a house after clearing away your debts.
Improve Your Credit Score
If you have completed your proposal or bankruptcy, or if your credit only requires a few minor changes, here are some steps you can take to rebuild your credit:
- Pay all monthly bills on time, including rent (or mortgage), hydro and your cell phone bill. If you pay your bills late, you may be reported to the credit reporting agencies, which can lower your score.
- Open a savings account and start saving money. Savings don’t get reported on your credit report, but you will want a down payment when you buy your house, and savings will be necessary for step No. 3.
- Apply for one secured credit card. Even with bad credit, you can get a secured card by handing over a security deposit, usually $500 or $1000. Because the card is reported to the credit bureau as a normal credit card, it will gradually help improve your credit score. It’s imperative that you pay your balance in full each month, and keep in mind that multiple card applications may potentially lower your credit score.
- If you have existing credit, such as a credit card or line of credit, keep them open, as the length of credit history improves your credit score (the longer, the better).
- If you have a credit card, use it sparingly each month, and pay the balance when it’s due. Showing that you are responsible with credit is the most important factor in maintaining a good credit score.
- If you do carry a balance, it is best to keep the balance on credit cards and lines of credit below 30 percent of the approved limit.
By adopting these healthy spending habits, you will improve your credit score, save money and increase your chances of being approved for a mortgage.
About the Author
Doug Hoyes has extensive experience resolving financial issues for Canadian citizens. A Licensed Bankruptcy Trustee and co-founder of Hoyes, Michalos & Associates, he is also a Chartered Professional Accountant (CPA), Chartered Insolvency and Restructuring Professional and Business Valuator. He regularly comments on a variety of TV, radio and other media outlets on topics surrounding bankruptcy and writes a column for the Huffington Post. Hoyes has been a Licensed Trustee since 1995 and has testified before the Canadian Senate’s Banking, Trade and Commerce Committee in 2008.