How to get a mortgage with bad credit in Canada? Many Canadians face credit problems when life’s obstacles stand in the way, be it illness, job loss, a global pandemic or simply a lack of credit. It can take some time to get back on track, which could mean putting off buying a home.
However, waiting may not work for some, who, aside from the bad name, have all their ducks lined up and ready to take the plunge into owning a home.
The good news is that there are ways to get a mortgage with bad credit, as well as other options if you find yourself in that situation. The bad news is that they are not always cheap. Here’s our guide on how to get a mortgage with bad credit.
How to Get a Mortgage With Bad Credit In Canada?
If you want to get a mortgage today, here are 6 steps on how to get a mortgage with bad credit in Canada.
1. Prepare a larger deposit
The minimum down payment for a mortgage default insurance policy is 5%. However, if you don’t qualify for a major lender that offers standard mortgage insurance, you’ll need to save a higher down payment.
2. Look at all mortgage lenders with bad credit
Alternative lenders (also called subprime or B lenders) are more flexible when it comes to credit. However, in exchange for that flexibility, you have to make a larger deposit. An alternative lender wants you to make at least a 20% down payment to qualify for bad credit mortgages. Depending on your credit score, the location of the property and other factors, expect to pay between 20% and 35% for mortgages with bad credit.
3. Consider Taking a Co-Signer or Combined Mortgage
If you can’t save a bigger down payment and want to buy now, another option is to get a countersigned. An ideal co-signer is someone with good income, good credit, and low debt, which can help make up for any weaknesses in your mortgage application (ie your credit rating). The co-signer agrees to make the mortgage payments if you are unable to do so, giving the lender additional peace of mind.
4. Find Out If You Are Eligible For Deposit
If you are buying a home for the first time, you may be eligible for a down payment. The First Time Home Buyer Incentive offers you money for a down payment on your first home in exchange for an equity stake in the property. This can help you shop faster and save on standard mortgage insurance.
5. Look for First Home Buyer Programs
Other programs for housing first-time buyers include the Home Buyers’ Plan (HBP), the Land Transfer Tax Rebate, and the First-Time Homebuyer Tax Credit.
6. Don’t go deeper into debt
Try to avoid taking on more debt because that hurts the debt service ratios that lenders use to qualify you. Instead, focus on paying your existing debt on time and try to pay off any revolving credits (i.e., credit cards and lines of credit). Ideally, you want to pay off your balance below 30% of your available credit.
Bad Credit Mortgages from Lenders A
Most A lenders do not approve mortgages for bad credit applicants. Your credit score and credit history are one of the most important indicators of your financial responsibility. As such, having bad credit will make you seem like a greater risk to A-lenders for conventional mortgages and other loans, lines of credit, and credit cards. If you have bad credit and want to get a mortgage, it’s possible to improve your score in less time than you think. Making your payments on time, keeping your credit usage low, and not trying to open new credit products until your score improves are all good places to start. However, if you have bankruptcies, delinquent collections, or other red flags on your credit report, consider working with a credit advisor to get better credit back.
Mortgages with bad credit at B Lenders
If you have bad credit and are still looking for how to get a mortgage with bad credit in Canada, you may be able to get approval from a B lender. Mixed lenders have slightly different, often less strict, mortgage approval criteria than A lenders, but often they charge require higher and higher down payments (minimum 20% for uninsured mortgages). Examples of B lenders in Canada are:
- First National
- Merix Financial
- Financial Radius
- Trust At Home
What is the easiest bank to get a mortgage in Canada?
If you’re looking for an easy way how to get a mortgage with bad credit in Canada, you won’t find one if you have bad credit. The vast majority of mortgages in this country are provided through the major banks (CIBC, CMO, RBC, TD, Scotia bank and National Bank) all of which apply essentially the same rules and requirements to all mortgage applicants.
If you have a credit score of less than 650, it can be difficult to get approved for a mortgage with a bank or credit union in Canada. Alternatively, you can use a mortgage broker to connect you with private lenders, many of which don’t require you to pass the same stress test as banks.
Who Qualifies for Bad Credit Mortgages?
You may qualify for a bad credit mortgage if your credit score is less than 600 and you have a down payment or equity of 20% or more. If you have a credit score of less than 600 and have not lowered at least 20%, chances are you will not be approved for a bad credit mortgage. If you have a good credit score and a down payment of 20% or more, consider better options, such as mortgages from lenders B and A.
How to Check Your Credit Score for a Mortgage in Canada
In Canada, your credit score is an important financial indicator. But how do you know if you have a bad credit score in the first place?
What is a credit score?
In Canada, your credit score is a number between 300 and 900 assigned to you by a credit bureau: Canada’s two major credit bureaus are Equifax and TransUnion. This number is used to tell lenders how you have handled available credit in the past. The higher your credit score, the better, as a high credit score helps you qualify for the lowest possible mortgage interest rate.
- 680+: Good
- 600-679: Fair
- Less than 599: bad
*These categories vary by lender
How do you check your credit score?
There are a few ways to find out your credit score. First, you can go straight to the source and pay for your credit score and credit report (which is a detailed record of your credit history) at Equifax or TransUnion.
If you don’t want to spend the money on a detailed credit report, it’s worth checking with your bank. Many banks offer customers the option of performing a limited number of “soft” credit checks per year for free. A “soft” credit check will be visible on your credit report, but only you can see it and it will not affect your credit score. Once you know your credit score, you’ll have a better idea of whether you qualify for a traditional mortgage or whether you should apply for a mortgage with bad credit.
It is important to note that the credit score you receive may differ from the score a potential lender gets on your behalf. Each credit bureau uses a different calculation to calculate your credit score, and lenders sometimes use bureaus that are not available to consumers. Fortunately, the differences are usually small.
How to Improve Your Credit Score
While not an exact science, several factors affect your credit score. These include things like:
Your payment history: This is possibly the single most important factor affecting your credit score. Paying on time is considered essential to improve your credit score.
Your credit usage, that is, what percentage of your total available credit you use each month. Most sources recommend 30% usage as optimal.
The age of your oldest registered account: Longer credit history usually has a positive effect on your creditworthiness, provided that other factors are also in order.
Offer different types of credit. Showing that you can manage a wide variety of products from credit cards to lines of credit shows that you are a more responsible borrower and that you can improve your credit score.
The number of hard searches in your file: A soft application does not affect your credit score and is usually used by an individual or company to check your credit score for easier reference purposes. However, lenders use difficult questions when you apply for a loan, e.g. for a car or a mortgage. Difficult questions often affect your credit score and can be a negative sign if they appear multiple times in a short period.
Your full credit is available. Having more available credit is generally beneficial to your score (assuming everything else is in order) because it shows that other lenders have entrusted you with larger amounts.
The period between opening new accounts: This has a minor impact on your score but can affect it. If you’ve opened multiple accounts in the past year, it could be a sign to some lenders that you’re in financial trouble and need the money. However, this is taken into account much less than other aspects, such as your payment history.
Companies Using Canadians to Check and Improve Credit Scores
There are several free credit score providers that Canadians can use. They each use a specific agency to retrieve your credit information and have different reporting frequencies.
|Free Credit Score Provider||How Often Can You Check?||Credit Bureau Used|
|Capital One *Must have at least one Capital One product active||Any time||TransUnion|
The Cost of a Bad Credit Mortgage
Qualifying for a mortgage when you have bad credit can lead to higher interest rates. If your credit score is between 600 and 680, you may still qualify for a major bank, or a non-bank or one-line lender (accessible through mortgage brokers). However, if your credit score is below 600, you should work with an alternative or private lender.
An alternative lender can be a great loan solution to get the job done, although it is important to note that working with an alternative lender result in higher interest rates. If you have to work with a private lender because you don’t qualify for an alternative lender, expect to pay even higher interest rates.
The table below provides an illustrative example of the different types of rates you may qualify for based on your credit score.
|Type of Lender||Credit Score||Mortgage Rates (5-year Fixed)*||Examples of Lenders|
|Prime Lenders||600-900||2.49%-2.99%||Banks and credit unions|
|Alternative Lenders||550-700||2.99%-4.99%||Trust companies|
|Private Lenders||Less than 600||10%-18%||Private companies|
What are the 5 ranges of a credit score?
Here are the 5 credit score ranges from our Ultimate Guide to Credit Scores in Canada that may appear on your credit report.
741-900 (Excellent): If the rest of your mortgage application is strong, you should be able to qualify for the best mortgage interest rates from a lender without a problem.
713-740 (Good): Assuming the rest of your mortgage application is solid, you should qualify for the best mortgage rates with most lenders.
660-712 (fair): You may or may not qualify for the best mortgage interest rates from a lender. For that, your mortgage application must be solid elsewhere.
575-659 (below average): If your credit score is above 600 and strong elsewhere, you may still qualify for a lender’s best rates if you’re insured as standard. Otherwise, expect higher mortgage rates, especially if you have to work with an alternative lender.
300-574 (Poor): You have to work with an alternative or private lender, resulting in higher mortgage rates and lenders.
What credit score do you need for a mortgage?
To qualify for a mortgage with an A or Prime lender at the lender’s best available mortgage rate, you need a good credit score. Major lenders generally look for a credit score of 680 or higher. Some mortgage lenders allow you to qualify with a credit score between 600 and 680 if you purchase mortgage default insurance.
If you don’t meet the minimum credit score requirement and your credit score is below 600, you should work with a B or subprime lender.
Your credit score is designed to predict how likely you are to pay your bills on time. However, it is not the only factor that lenders consider. Other factors lenders may consider include:
- Your Income
- Your Job
- Your Payment History
- Your Financial History
- The Amount Of The Mortgage Loan
- The Property Itself
Major lenders also don’t want you to be in the middle of a bankruptcy or consumer proposal. If you’ve filed for consumer account bankruptcy, major lenders want you laid off for at least 24 months. They also prefer to work with people who have rebuilt their credit scores.
If you haven’t reached the 24-month point yet or rebuilt your credit score, you’ll need to work with a subprime lender if you want mortgage financing today.
Impact of Bad Credit Score on a Home Loan Application
A bad credit score means you may not qualify for standard mortgage insurance. As such, instead of just having to save a 5% down payment, you may need to save a 20% to 35% down payment for Borrower B.
Not only can it take longer to save a down payment, but Borrower B’s mortgage interest is almost always higher than Borrower A’s interest. Not to mention there are additional fees associated with Borrower B’s. A Lender with Lender B. The lender’s fee is typically 1% to 2% of the mortgage amount, although this can vary. It’s added to your mortgage balance, which means you don’t have to pay anything out of pocket right away, although it does add to the total cost of the loan over the life of your mortgage because you pay interest on it.
Does credit score affect standard mortgage insurance?
No, your credit score does not directly affect how much you pay on a standard mortgage insurance policy. The standard mortgage insurance premiums you pay are based on the amount of your mortgage and the size of your down payment relative to the purchase price of the home.
That said, your credit score does affect mortgage default insurance. To get started, you must be eligible for standard mortgage insurance. As mentioned, some mortgage lenders may rate you with a credit score between 600 and 680 if you purchase standard mortgage insurance. If you have a credit score of less than 600, mortgage default insurance is not an option and you should look for another solution, such as saving 20-35% on your down payment and going with an alternative lender.
You need mortgage default insurance because it protects the lender in case of default. When you put less into a property, you are considered riskier in the eyes of the lender. Mortgage standard insurance gives lenders the added peace of mind that if something were to happen and you were unable to make your mortgage payments, the CMHC or private mortgage insurers would cover your lender’s losses.
How to get a mortgage with bad credit in your county?
How to get a mortgage with bad credit in Canada? Getting approved for a mortgage is pretty much the same process across the country. It doesn’t matter if you’re trying to get a mortgage in Ontario or Alberta, most of the same rules apply. Lenders and banks will look at the same information — your income, debt, and credit score — and make their assessments based on how much they think you can afford.
The rules for deposits are also the same across the country. So if you’re trying to buy a $600,000 home in British Columbia, you’ll need exactly the same down payment as you would if you were trying to buy a $600,000 home in Manitoba or Saskatchewan.
However, there are some subtle differences when buying a home depending on your province. This is mainly because provinces are trying to control rising housing costs and make home ownership more affordable. For example, the BC government has introduced a “cooling off period” that gives potential home buyers more time to change their minds and forgo any offer they make on a property. Other provinces, such as Nova Scotia and Ontario, have increased non-resident speculation taxes in an effort to make more housing available to locals.
These province-by-province changes in homeownership are constantly changing, so before you take the plunge, be aware of the rules specific to your province.
How to Increase Your Chances of Getting Approval for a Mortgage?
Here are some great ways to increase your chances of getting a mortgage approval.
· Check your credit score and keep it regularly
Checking your credit report and credit score regularly will help you see which direction you are heading. If it doesn’t work out, you can continue with what you’re doing. However, if you fall, you can take corrective action to improve your score, such as making your payments more timely.
· Improve your credit score
As you can see from the table above, a higher credit score is beneficial because it helps you get a lower mortgage interest rate, resulting in lower monthly mortgage payments. If you’ve checked your credit score and it’s too low to qualify for a mortgage from the major banks (often referred to as “A lenders”), you may want to spend some time improving your credit score before applying for a mortgage.
Here are our top tips for improving your credit score:
Pay your bills on time – Never miss a monthly payment on your bills, including debt payments, utilities, and even your cell phone bill. If you can’t pay the bill in full, don’t ignore it, as that will only put you in default and hurt your credit score. Instead, contact your carrier about a payment plan.
Stay under your credit limit – Try not to use more than 30% of your available credit limit on your credit cards or lines of credit. This shows the credit reporting agencies that you are a responsible spender and that you are not overextended.
Don’t apply for too much new credit – Do not apply for too many credit cards, as this can be a warning to credit reporting agencies that you need cash quickly.
Keep your oldest account – The length of your credit history matters. Cancelling old credit cards will remove them from your file and shorten your credit history. Consider keeping your oldest credit card open, even if you don’t use it, to maximize the length of your credit history.
If you apply these tips to your finances, you should see your credit score start to rise after a few months. If you need to buy a home before you qualify for a mortgage from a lender, you can still apply for a mortgage from a reputable company or private lender.
· Keep an eye on your credit utilization ratio
As mentioned, you want a balance that is no more than 30% of your available credit limit on revolving credit, such as credit cards and lines of credit. By regularly checking your credit utilization ratio, you can pay off credits when they begin to approach the 30% threshold to ensure they don’t negatively impact your credit score.
· Timely payment of your bills
A mortgage lender will want to see that you have a good history of paying on time on all of your other credit accounts. Showing that goes a long way in improving your chances of getting approved for a mortgage.
· Using credit-building programs
If you want to improve your credit faster, consider a credit-building program. A credit-building program can be a quick way to improve your credit score so that you can qualify for a mortgage from a major lender sooner.
· Consider a co-signer or joint mortgage
Another option for getting a bad credit mortgage in Canada is to have a co-signer on your mortgage. A countersigned mortgage brings in a third party as guarantor of the mortgage. The co-signer agrees to pay your monthly mortgage payments if you are unable to do so. Getting a co-signer for your mortgage gives you access to better mortgage rates because your co-signer is essentially a co-borrower, so your income and credit score are taken into account during the mortgage application process.
There are some risks in using a co-signer for your mortgage. First, since the co-signer is responsible for your mortgage, they are taking a major financial risk on you. If you stop paying your monthly mortgage payments, your co-signer will be financially responsible. For this reason, most co-signers are related to the addressee. For example, your parents may agree to co-sign your mortgage.
There is also a risk for you. In most cases, your lender will require your co-signer to become a co-owner of the home, meaning your name will be on the title of the property. This ownership interest can lead to conflict between co-signers, especially when it comes time to sell the home.
A joint mortgage is another option to consider. Unlike a joint mortgage, with a joint mortgage usually, two or more people own and live together in one house, but not always. There are pros and cons to joint mortgages, so be sure to do your research.
· Work for your next renewal
With all this doom and gloom, it can seem like there are no good options for getting a bad credit mortgage! However, there is also good news. Any bad credit mortgage can be renegotiated at the end of the term. Most maturities are 5 years, which is a long time to improve your financial situation.
Try to improve your credit score between the start of your mortgage contract and your renewal date. By using the tips above, you can improve your credit score enough to move from lender B to lender A. This will result in an overall lower interest rate, which can save you thousands of dollars in interest.
There are, of course, some caveats. If you start a mortgage with standard mortgage insurance, you can’t lose it by switching lenders for your next contract. The same applies to any additional costs that you charge if you borrow from lender B.
Whatever your financial position, you should always look for a better mortgage rate when you renew. A common mistake is simply renewing with your current lender at a higher rate than you might qualify for elsewhere. Read our tips on how to extend a mortgage to maximize your savings.
Conclusion – How to get a mortgage with bad credit in Canada
To buy the best mortgage options possible, it is important to plan ahead. If you need to qualify right away, you can work with an alternative lender or get a co-signer. If you have time to qualify, you can take steps to improve your credit, such as making your payments on time and paying off your credit card balances.
By taking these necessary steps, you can ensure that the mortgage approval process goes smoothly if you have bad credit.