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Bad Credit Mortgages on Cottage Properties

Looking into a mortgage for a cottage? Understanding that lenders classify these dwellings into two different types is a good start.

The Type A version is considered a year-round home with winterized access. There is a permanent foundation resting below the frost line, potable running water and a permanent heat source.

Mortgages for these cottages are similar to other permanent residences. There is a minimum down payment and the possibility of fixed and variable terms. These properties are also eligible for refinancing once the equity has been built up.

Seasonal access is the defining characteristic of the Type B cottage. These generally have running water but no permanent heat source. The foundation is called floating because it sits on pilings or concrete blocks.

Which Cottage Type is Best?

In general, Type A cottages are more desirable than Type B cottages. Mortgage approval for Type A cottages is also more lenient in general. Type B cottages tend to have cheaper purchase prices.

Getting a mortgage for either type of cottage means meeting certain requirements. Even then, a cottage can be financially draining for some people. Lake levels are getting increasingly higher in some areas. That can mean extra costs with the ice breakup in the springtime and damage to a boathouse or dock.

Several Solutions to Payment Issues  

Some cottage owners might find it difficult to meet their payments and cover mortgages. If you are one of those people, several solutions will allow you to free up some funds by tapping into your existing equity.

These lending options also exist for people that have damaged credit. If you fall into that category (usually the numbers are from 300-579), this info can help you improve those ratings.

Mortgage Lender Options

Mortgage lenders are generally classified into three categories. If you’re a cottage owner looking for a second mortgage loan in spite of your bad credit, it’s important to find an option that goes beyond income and credit as the approval criteria.

Following are the different types of lenders in Ontario you’ve got to choose from.

Types of Ontario Lenders

A Lenders

These are generally major banks. Applicants need to have strong credit scores and easy-to-calculate, substantial income. Obtaining second mortgage financing can be challenging through these financial institutions. The big banks put property owners through stringent mortgage stress tests.

B Lenders

Trust companies and credit unions make up the bulk of these lenders. They usually expect credit scores of 550 or above. They usually ask for a slightly lower household income level than what is required by an A Lender.

If there’s a problem with your credit score and you’re looking for a mortgage for a cottage, the third type of lender in Ontario is a suitable choice.

C Lenders

Private lenders in Ontario take a different route from their more-traditional counterparts. More conventional sources focus on metrics like the amount and type of income and credit score.

A private lender can consider other criteria.

Private Lender Criteria for Bad Credit Mortgages in Cottage Properties

A private lender is an excellent alternative for someone turned down by a big bank or financial institution. These individuals and/or financial entities are also called alternative lenders. They are different and work independently from provincially or federally regulated trust companies, credit unions and banks.

Following are some of the criteria to consider when looking at an application for a bad credit mortgage.

Private lenders focus on the appraised value of a property. They also look at the current condition. The degree of existing equity is also a determining factor. The same can be said of the location.

Equity

These lenders generally want to see more than $70,000 of equity before they consider a second (bad credit) mortgage.

There’s another important calculation. A C (or private) lender will also be looking at the Loan To Value Ratio (LTV) of a cottage.

Value of the Property

It’s important to keep in mind that private mortgages and bad credit mortgages place emphasis on the value of the property. The LTV is a measure of the value of the equity involved. Many private lenders use this as their primary criteria for approval along with the location. 

Here’s an example of how this works. A property’s value is $1 million, and the first mortgage is worth $500,000. A second or bad credit mortgage could be $200,000. 

The calculation works this way: 

500,000 + 200,000/1,000,000 = 0.70 or 70%

It’s also good to know the limits. For example, a private lending company in Ontario generally won’t go higher than 75% LTV.

Interested in A Bad Credit Mortgage?

If you’re interested in a bad credit mortgage on cottage properties, you should also know about the rates and fees charged. 

Private Lender Rates and Fees

 A private lender uses different criteria to establish rates. With a bad credit mortgage, the risk for lenders is higher, and the mortgage rates and associated fees follow suit. Most of these companies charge between 7 to 12%. Of course, this depends on individual circumstances.

The fees are designed specifically to offset lending costs. Generally, these are between 3% and 6% of the entire cost of the loan.

Some Good Ways to Improve a Bad Credit Score

Having bad credit doesn’t mean you can’t get a mortgage on a cottage property. However, improving your credit score will allow any property owner different options when financing a loan or mortgage.

An Excellent Credit Snapshot

Here’s a good starting point. TransUnion provides an excellent snapshot of what your credit report is. Improving your score begins by making sure all the information is accurate. That includes data on your identifying information, inquiries, credit history, and other reference points. You need to report any errors right away. 

Mortgage Broker Store can help connect clients looking for bad credit mortgages on cottage properties. We work closely with a comprehensive network of private lenders. Let us help you with the relevant decisions you need to make during the process. We supply free quotes and expert advice. Email ron@mortgagebrokerstore.com or call 416-499-2122. 

 

 

 

 

Posted by Wilf Knappers on
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