Getting a mortgage with bad credit in Canada may seem challenging, but it’s not impossible. If you’re keen to buy a property and think you have bad credit, you might be concerned that mortgage lenders will think you’re irresponsible and an unreliable borrower. You might even fear that lenders won’t approve your mortgage application, thinking that you won’t be able to handle the payments. Yet many Canadians with less-than-perfect credit scores are still able to secure financing for a home. While a higher credit score brings access to better mortgage options including more favourable interest rates, it is still possible to get a mortgage with bad credit in Canada. With some careful planning and research, you can put your best foot forward in your mortgage application. So, can you get a mortgage with bad credit in Canada? Here’s a guide on how to navigate the process and improve your chances of having your mortgage approved.
What is bad credit and what does it mean?
Your credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 900 in Canada. Lenders use this score to assess the risk of lending you money. Generally, a score below 650 is considered subprime, and anything above 700 is considered good. If your score falls below 600, you are likely to face difficulties in securing a traditional mortgage. Having a poor credit score indicates to mortgage lenders that it’s likely you won’t be able to make your loan payments on time. This can mean some lenders aren’t willing to lend you a mortgage, as there’s increased risk that you could default. Here are the two most common signs of having bad credit:
- Low credit score – if you have a ‘good’ credit score (700+), you can get a mortgage from a traditional financial institution like a bank. This will give you the most favourable interest rates and terms. A ‘fair’ credit score (600 – 699) shouldn’t hinder your chances of a mortgage too much. If you have a ‘bad’ credit score (>600), you will struggle to secure a mortgage from a traditional lender as you won’t be able to secure an insured mortgage. You’ll need to go to an alternative lender instead, like a B lender or a private lender.
- Poor credit report – even if you have a good credit score, most mortgage lenders will see your credit report in a bad light if there’s any of the following:
- Bankruptcy
- Overdue payments
- Closed accounts due to payment defaults
- Accounts sent to collection agencies
- High credit utilization
- An unusually high number of credit inquiries
Factors that impact your credit score
Several factors can negatively impact your credit score, including:
- Late or missed payments: not paying your bills on time, or paying them at all.
- High credit utilization: using a large portion of your available credit can imply to banks that you can’t live within your means.
- Bankruptcy or consumer proposals: legal actions to resolve unpaid debts.
- Multiple credit inquiries: frequently applying for new credit, suggesting you need to borrow more than you can afford.
It can take years for these adverse events to disappear from your credit report. Late payments and loans sent to a collection agency, for instance, can remain on your report for up to six years.
How does bad credit affect your ability to get a mortgage?
While it’s definitely possible to secure a mortgage in Canada with bad credit, you need to be realistic about the situation and take into consideration the consequences. If you’re a borrower with a a poor credit history or a bad credit score, you’ll need to face higher interest rates, fees, and even strict terms and conditions on your mortgage. It might also be difficult to find an extended term (five or more years), and your lender may require a larger down payment. If you’re refinancing a mortgage, your lender might only approve your mortgage application if you have equity in your home.
How to get a mortgage with bad credit
Thankfully, there are some ways you can explore to get the mortgage you need for your home. Here are some of our top tips for securing a mortgage when you have bad credit:
Check your credit report
Before applying for a mortgage, obtain a copy of your credit report from Canada’s two major credit bureaus (Equifax and TransUnion) to ensure there are no errors and to understand your credit standing.
Improve your credit score
While it may take time, improving your credit score can significantly increase your chances of securing a mortgage. Pay down debts, avoid late payments, and limit new credit inquiries. At Spergel, we can help you to rebuild your credit score.
Save for a larger down payment
A larger down payment reduces the lender’s risk. If you can manage to save at least 20% of the home’s purchase price, you may find it easier to get approved.
Consider a subprime mortgage lender
If traditional banks turn you down, consider subprime lenders who specialize in providing loans to individuals with poor credit. These lenders will typically charge higher interest rates and may require larger down payments. They usually have more lenient criteria for mortgages, and are more likely to accept applicants with a poor credit score. It’s often worth appointing a mortgage broker to help you to find a poor credit mortgage lender as they know how and where to find the best deals.
Apply with a private lender
If you struggle to secure a mortgage from a subprime lender, you might need to approach a private lender instead. Criteria for a private lender are lower than subprime lenders, so you could secure a mortgage even with a bad credit score. Private lenders don’t typically focus on your credit score, but other factors too like income and home equity. A private lender is the easiest way to get a mortgage if your credit is suffering. Do note, private lenders do have exceptionally high interest rates, fees, and a low tolerance for late payments. Missing a payment could lead to foreclosure or power of sale.
Get a co-signer or guarantor
A co-signer with good credit can improve your chances of getting approved. The co-signer agrees to take on the responsibility of the loan if you default. Whoever you ask to be your co-signer should have a strong credit history and earn a stable income. A guarantor is similar to a co-signer in that they share the responsibility for the mortgage payments with you, yet the lender will only chase them for payment if they’re not able to collect money from you first.
Provide proof of income and employment stability
Lenders will be more inclined to approve your application if you can demonstrate stable income and employment history. Provide documentation such as pay stubs, tax returns, and employment letters.
Consider a rent-to-own home
A rent-to-own agreement in Canada offers an alternative home financing option for those with poor credit or limited down payment funds. It involves renting a property while accumulating rent credits that can be used as a down payment at the end of the lease phase, allowing you to build credit and save for a future purchase. This arrangement does, however, often require higher-than-average rent and carries risks, such as potential penalties if you don’t qualify for a mortgage or decide not to buy the property.
Pros and cons of getting a mortgage with bad credit
We’ve summarized some of the advantages and disadvantages of securing a mortgage with bad credit so you’re well placed to make a decision on what’s right for you and your financial circumstances.
Pros of getting a mortgage with bad credit
- Homeownership: even with bad credit, you can still achieve the dream of owning a home.
- Equity building: making mortgage payments helps you build equity over time.
- Credit improvement: consistently paying your mortgage can improve your credit score.
Cons of getting a mortgage with bad credit
- Higher interest rates: expect to pay more in interest compared to those with good credit.
- Larger down payments: you may need to provide a higher down payment to secure a loan.
- Stricter terms: lenders may impose more stringent terms and conditions.
Tips for improving your credit score
To improve your chances of securing a mortgage in the future, consider these tips:
- Pay your bills on time: consistent, timely payments boost your credit score.
- Reduce debt: lower your credit card balances and pay off outstanding loans.
- Avoid new credit: limit applying for new credit until your score improves.
- Keep old accounts open: the length of your credit history impacts your score, so keep old accounts open even if you don’t use them frequently.
Can you get a mortgage with bad credit in Canada? FAQs
Here are some of the most commonly asked questions we receive around getting a mortgage with bad credit.
How does a bankruptcy on your credit report affect your mortgage application?
A bankruptcy on your credit report significantly impacts your mortgage application by lowering your credit score and raising red flags for lenders, who may view you as a high-risk borrower. This can result in higher interest rates, stricter lending terms, or outright denial of your mortgage application. Additionally, many lenders require a waiting period, often two years or more, after a bankruptcy discharge before considering your application, during which you must rebuild your credit and demonstrate financial stability.
Can I get a mortgage with no Canadian credit history?
Obtaining a mortgage with no Canadian credit history can be challenging but is possible. Lenders rely heavily on credit history to assess risk, and without it, they may be hesitant to approve a mortgage. However, alternatives include providing a substantial down payment, showing proof of steady income and employment, and offering a detailed credit history from your home country. Additionally, some lenders may accept alternative credit references, such as rental payment history and utility bills, to establish your financial reliability. Working with a mortgage broker who understands these unique circumstances can also increase your chances of securing a mortgage.
What is the lowest credit score to get a mortgage in Canada?
In Canada, the minimum credit score required to qualify for a mortgage generally ranges from 600 to 680, depending on the lender and type of mortgage. Traditional lenders, like banks, typically require a score of at least 620 to 680 for approval. However, alternative lenders or private lenders might consider applicants with lower scores, sometimes as low as 550, though these mortgages often come with higher interest rates and stricter terms. Maintaining a good credit score improves your chances of getting favourable mortgage terms and lower interest rates.
Which bank gives a mortgage with bad credit?
Several banks and lenders in Canada offer mortgages to individuals with bad credit, though the terms may vary. Major banks like TD Canada Trust and BMO may provide mortgages to those with less-than-perfect credit, but typically require a higher down payment and may charge higher interest rates. Alternative lenders, such as Home Trust and Equitable Bank, specialize in offering mortgages to those with poor credit histories, often with more flexible terms but at a premium. It’s crucial to shop around and compare offers to find the best possible terms given your credit situation.
While getting a mortgage with bad credit in Canada presents challenges, it’s certainly not impossible. By understanding your credit score, exploring alternative lenders, and improving your financial habits, you can increase your chances of securing a mortgage. As Licensed Insolvency Trustees, the team at Spergel (the ‘get rid of debt’ people) can help you to resolve your credit cards, payday loans, and other debts preventing you from getting a mortgage. Book a free consultation with a member of our team today.