A low credit score can close the door at a bank, even if you have plenty of equity in your home. Private lenders look at things differently. Credit still matters, but it’s not the deciding factor. Here’s what private lenders focus on when your credit is damaged, and how to use a private mortgage to get back on track.

Why banks say no

Banks and other federally regulated lenders rely heavily on credit scores and history. Missed payments, collections, high card balances or a past bankruptcy can mean an automatic decline, regardless of how much equity you have.

What private lenders look at instead

  • Your equity. How much of the home’s value is left after all mortgages. See loan-to-value.
  • The property. Whether it would be easy to sell.
  • Your exit plan. How you’ll repay or refinance.
  • Affordability. Whether you can make the payments in the meantime.
  • The story behind the credit. A job loss, illness or separation that’s now behind you reads differently than ongoing problems.

What still matters

Bad credit doesn’t disqualify you, but it can affect the rate and fees. Recent or ongoing problems, like missed mortgage payments in the last few months, tax arrears or active collections, may need to be paid out from the new mortgage as a condition of approval.

Using a private mortgage to rebuild

A private mortgage can be a reset: pay off the debts that are hurting your credit, make one manageable payment, and rebuild. To make it work:

  1. Pay off the right debts. High-interest cards and collections often do the most damage.
  2. Make every payment on time, on every account, from day one.
  3. Keep balances low on any credit cards you keep.
  4. Don’t take on new debt during the term.
  5. Check your credit reports from both Equifax and TransUnion, and dispute errors.
  6. Review progress with your broker partway through the term.

The goal is to move to an alternative lender, or a bank, when the term ends. See your exit strategy.

Is a private mortgage the right move?

Not always. If your credit problems are minor, an alternative lender may approve you at a lower cost. If you have no realistic way to improve your situation within the term, a private mortgage may only delay the problem. See who private mortgages are for, and 7 myths about private mortgages for what’s true and what isn’t.

Your first step

A licensed broker can review your situation and tell you honestly which lenders are realistic, starting with the cheapest.

This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.