Where Can I go to fix my Bad Credit?

Bad Credit is Not the End of the World

Purchase options available to you if you have bad credit

Buying real estate with bad credit is not the end of the world, it just requires a carefully thought out plan by the investor and their mortgage agent.

Here are some common investment strategies for those who have sufficient capital to make a down payment and/or service the mortgage payments, but have damaged credit.

1. Buy owner-occupied properties with income suites

This investment strategy is great for new investors with damaged credit to build a real estate portfolio. Because these properties are partially occupied, the borrower can qualify for owner-occupied mortgages up to 90% of the property’s appraised value. Today there are more lending options for the self-employed and in the sub-prime mortgage market, which reduces the need for private financing.

These are typically residential dwellings – some are single-family dwellings with legal basement suites or multi-units up to four-plex¬es and may include vacation properties that you can rent during the different seasons.

As an owner-occupier, you have the option to convert part of the property for rental use as your credit improves. This allows you to take advantage of widely available insured renovation mortgage programs.

If government insurance is available to the investor with poor credit, then 95% loan financing is available for owner-occupied properties up to four suites, further reduc¬ing the investor’s upfront capital invest¬ment. And if the financing is structured as a secured line of credit, the loan is usually reported on the investor’s credit bureau, therefore assisting with credit repair.

2. Rent-to-own or lease-to-own

This real estate investment strategy gives a ten¬ant the option to purchase a home from a real estate investor at the end of a lease period.

Rent-to-own involves the tenant mak¬ing a larger upfront deposit and higher rent payments with a portion of the rent proceeds allocated for the tenant’s future down payment.

This allows for the transition into real es¬tate investing as a “homeowner,” especially if one is in a bankruptcy, a consumer proposal or has recently experienced a power of sale.

And there is a built-in “exit” strategy for the investor because the tenant is intend¬ing on buying the property at the end of the lease period. This investment strategy is usually a one- to two-year commitment, up a maximum of five years, which gives the investor and/or tenant time to improve his or her credit

Most institutional lenders in the sub-prime space will lend between 65% and 75% of an investment property’s appraised value, so expect to make a larger down payment under this investment strategy. However, for those who cannot obtain any form of mortgage financing, this strategy is easy to sell to other investors via joint venture.

3. Joint venture

This involves investor resource pooling to purchase real estate, which reduces the in¬vestor’s own costs. These “resources” could be financial, experience, skills, access to real estate, etc.

A joint-venture strategy can also be used to pay off maturing debt for an existing investor who has damaged credit and cannot refinance or renew.

Joint-venture (JV) investing is common in commercial real estate or land purchases. Some private lenders are willing to be a JV with an investor who has access to “seed cap¬ital.” Given that the investor may have poor credit, institutional and private lenders will lend based on equity as opposed to credit.

Depending on your investment goals, you can build a diverse real estate portfo¬lio through joint venture to include land, commercial and/or residential real estate. Finding potential JV sources or partners can be easy if you network in the right circles.

How to repair your credit record

1 The easiest and quickest thing a person with poor credit can do to is to quickly resolve items that may be pulling their score down. Check your credit bureau or work with an experienced mortgage professional or credit repair specialist and correct potential errors.

2 Thirty-five per cent of your credit score is determined by your payment history. So automate bill payments for creditor liabilities that are routinely paid late. Never forgo making even the $10 minimum payments.

3 Open a secured credit card with a lender that reports to the credit bureau or get a secured line of credit that will also report to the bureau and keep those payments timely.

4 Pay all outstanding collections or find a reputable credit expert to help you negotiate a settlement on these items — you can get an instant boost to your credit score by 15 points or more.

5 Pay down revolving credit accounts such as unsecured lines of credit and credit cards. Since each lender uses a different minimum payment for mortgage qualifications, the higher the balance outstanding, the higher the minimum payment the mortgage lender must use.

6 Ensure your revolving credit balances are never reported over the limit granted by the creditor. This often happens when you are at or near your limit and the lender charges interest when your next statement is produced, causing the balances to be higher and lowering your balance-to-limit ratio. Since balance-to-limit utilization ratios have a huge impact on one’s overall credit score, an incorrectly reported balance may be artificially pulling one’s score down. Aim to keep your balances at no more than 50% of the creditor limit granted at any given time.

7 Don’t apply for a consolidation loan if you intend to purchase real estate in the near future. While the merits of doing so is admirable when you’re trying to reduce your debt, the higher balance reported relative to the approved limit of the consolidation loan in the first year or two will artificially lower your credit score.

8 Don’t shop for credit during your mortgage application process right through to mortgage funding. Many Alt A or sub-prime mortgage lenders pull a secondary credit bureau before funding and this can result in a decline if your score drops further than where it was at time of application.

9 Build and keep “active” credit. This means use credit cards you are approved for carefully and regularly. This is especially true if you have come out of a bankruptcy, consumer proposal or other emotional event that has caused your credit to decline. Having no “active” credit can be just as harmful from a credit perspective as having bad credit.

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