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How to Get a Mortgage When You Have Bad Credit in Canada

Sean Cooper

Jan 10, 2022 9 min read

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Getting a Mortgage with Bad Credit
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    Bad credit can happen for many legitimate reasons. Maybe you were downsized at work and haven’t been able to pay your bills. Maybe you’ve gone through a bankruptcy, a consumer proposal, or another legal matter. Maybe you’re new to Canada and you don’t know how credit works here, or you haven’t had a chance to build enough credit history.

    The good news is that having bad credit does not exclude you from qualifying for a mortgage. In a best case scenario, we encourage you to take the time to improve your credit score before applying for a mortgage. However, if you’re looking to buy a home now and you don’t have the necessary time to rebuild your credit score, there are still options.

    Working with alternative lenders or getting someone to co-sign on your mortgage are a couple ways you can still qualify for a mortgage. Let’s look at how to get a mortgage when you have bad credit in Canada.

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    6 Steps to Get a Mortgage When You Have Bad Credit

    If you want to take out a mortgage today, here are 6 steps to do so when you have bad credit.

    1. Prepare a greater down payment

    The minimum down payment with mortgage default insurance is 5%. However, if you don’t qualify for a prime lender that offers mortgage default insurance, you’ll need to save a heftier down payment.

    2. Look into all of the bad credit mortgage lenders

    Alternative lenders (also known as B or subprime lenders) are more flexible when it comes to credit. However, in exchange for that flexibility, you’ll need to make a larger down payment. An alternative lender will want you to make a down payment of at least 20% to qualify for bad credit mortgages. Depending on your credit score, the location of the property and other factors, expect to put down between 20% and 35% for bad credit mortgages.

    3. Think about getting a co-signer or a combined mortgage

    If you’re not able to save a larger down payment and you want to buy now, another option is getting a co-signer. An ideal co-signer is someone with good income, good credit and not a lot of debt, who can help make up any weaknesses in your mortgage application (i.e. your credit). The co-signer promises to make the mortgage payments if you aren’t able to, providing the lender with greater peace of mind.

    4. Find out if you're eligible for down payment assistance

    If you’re a first-time home buyer, you may qualify for down payment assistance. The First-Time Home Buyer Incentive offers you money towards the down payment of your first home in exchange for an equity stake in the property. This can help you buy sooner and save on mortgage default insurance.

    5. Look for programs for first-time home buyers

    Other programs for first-time home buyers include the Home Buyers’ Plan (HBP), land transfer tax rebate and First-Time Home Buyers’ Tax Credit.

    6. Avoid taking on more debt

    Try to avoid taking on more debt, as that will hurt your debt servicing ratios that lenders use for you to qualify. Instead focus on making the payments on time on your existing debt and aim to pay down the balances of any revolving credit (i.e. credit cards and lines of credit). Ideally you’ll want to pay down your balances to below 30% of your available credit.

    The Cost of a Mortgage with Bad Credit

    Qualifying for a mortgage when you have poor credit can result in higher interest rates. If your credit score is between 600 and 680, you may still be able to qualify for a big bank, or a monoline or non-bank lender (accessible through mortgage brokers). However, if your credit score is below 600, that’s when you’ll need to work with an alternative or private lender.

    An alternative lender can be a great lending solution to help get the job done, although it’s important to be aware that working with an alternative lender results in higher interest rates. If you need to work with a private lender because you don’t qualify at 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 be able to qualify for based on your credit score.

    Type of LenderCredit ScoreMortgage Rates (5-year Fixed)*Examples of Lenders
    Prime Lenders600-9002.49%-2.99%Banks and credit unions
    Type of Lender: Prime Lenders
    Credit Score
    600-900
    Mortgage Rates (5-year Fixed)*
    2.49%-2.99%
    Examples of Lenders
    Banks and credit unions
    Alternative Lenders550-7002.99%-4.99%Trust companies
    Type of Lender: Alternative Lenders
    Credit Score
    550-700
    Mortgage Rates (5-year Fixed)*
    2.99%-4.99%
    Examples of Lenders
    Trust companies
    Private LendersLess than 60010%-18%Private companies
    Type of Lender: Private Lenders
    Credit Score
    Less than 600
    Mortgage Rates (5-year Fixed)*
    10%-18%
    Examples of Lenders
    Private companies

    *Mortgage rates based on December 2021 data

    What are the 5 Ranges of a Credit Score?

    Here are the 5 ranges of credit scores 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 qualify for a lender’s best mortgage rates no problem.

    713-740 (Good): Assuming the rest of your mortgage application is strong, you should qualify for the best mortgage rates at most lenders.

    660-712 (Fair): You may or may not qualify for a lender’s best mortgage rates. You’ll need your mortgage application to be strong elsewhere in order to do so.

    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 it’s default insured. Otherwise, expect to pay higher mortgage rates, especially if you have to work with an alternative lender.

    300-574 (Poor): You’ll need to work with an alternative or private lender, resulting in higher mortgage rates and lender fees.

    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 rates, you’ll need a good credit score. Prime lenders are generally looking for a credit score of 680 or above. Some mortgage lenders may let you qualify with a credit score between 600 and 680 if you take out mortgage default insurance.

    If you don’t meet the minimum credit score requirement and your credit score is below 600, you’ll need to work with a B or subprime lender.

    Your credit score is meant to predict how likely you are to pay your bills on time. However, it’s not the only factor lenders consider. Other factors lenders might consider include:

    • Your income

    • Your employment

    • Your payment history

    • Your financial history

    • The amount of the mortgage loan

    • The property itself

    Prime lenders also don’t want you to be in the middle of a bankruptcy or consumer proposal. If you’ve filed for bankruptcy of a consumer proposal, prime lenders want you to be discharged for at least 24 months. They also prefer working with individuals who have rebuilt their credit score.

    If you’re not quite at the 24 month mark or you haven’t rebuilt your credit score, that’s when you’ll need to work with a subprime lender if you want mortgage financing today.

    Bad Credit Score Impact on a Home Loan Application

    A bad credit score means that you may not qualify for mortgage default insurance. As such, instead of only needing to save a down payment of 5%, you may need to save a down payment of between 20% and 35% for a B lender.

    Not only can it take you longer to save a down payment, B lender mortgage rates are almost always higher than A lender rates. Not to mention, there are additional fees associated with B lenders. You’ll typically pay a lender fee with a B lender. The lender fee is usually 1% to 2% of the mortgage amount, although it can vary. It’s added on top of your mortgage balance, which means you don’t have to pay anything out of pocket immediately, although it does add to the overall cost of borrowing over the life of your mortgage, since you’ll pay interest on it.

    Does Credit Score Affect Default Mortgage Insurance?

    No, your credit score does not directly affect how much you’ll pay in mortgage default insurance. The mortgage default insurance premiums you’ll pay is based on the size of your mortgage and the size of your down payment relative to the home purchase price.

    That being said, your credit score does affect mortgage default insurance. You have to qualify for mortgage default insurance to begin with. As mentioned, some mortgage lenders may let you qualify with a credit score between 600 and 680 if you take out mortgage default insurance. If you have a credit score below 600, that’s when mortgage default insurance isn’t an option and you’ll have to seek out another solution, such as saving a down payment of between 20% and 35% and going with an alternative lender.

    You need mortgage default insurance because it protects the lender in the event of a default. When you put less down on a property you’re considered riskier in the eyes of the lender. Mortgage default insurance gives lenders that added peace of mind that if anything were to happen and you were unable to make your mortgage payments, the CMHC or the private mortgage insurers would cover your lender’s losses.

    How to Improve Your Chances of Getting Approved for a Mortgage

    Here are some good ways to improve your chances of getting approved for a mortgage.

    Check your credit score and keep track of it on a frequent basis

    By checking your credit report and credit score on a regular basis, you can see the direction it’s heading in. If it’s heading up, you can keep doing what you’re doing. However, if it’s heading down, you can take corrective action to improve your score, such as doing a better job of making your payments on time.

    Keep an eye on your credit utilization ratio

    As mentioned, you want to aim to have a balance no higher than 30% of your available credit limit on revolving credit, such as credit cards and lines of credit. By regularly monitoring your credit utilization ratio, you can pay down balances when they start to creep towards the 30% threshold to ensure they don’t negatively impact your credit score.

    On time payment of your bills

    A mortgage lender will want to see that you have a good track record of making the payments on time on all your other credit accounts. By demonstrating that, it will go a long way in improving your chances of getting approved for a mortgage.

    Utilize credit-building programs

    If you’re looking to improve your credit more quickly, you might consider a credit-building program. A credit-build program can be a fast track to improving your credit score so you can qualify for a mortgage with a prime lender sooner.

    Final Thoughts

    To acquire the best possible mortgage options, it’s 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 until you need to qualify, you can take steps to improve your credit, such as making your payments on time and paying down your credit card balances.

    By taking these necessary steps, you can help ensure that the mortgage approval process goes smoothly when you have bad credit.

    Sean Cooper
    Sean Cooper
     | 
    Author & Mortgage Professional
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    Sean Cooper is the bestselling author of the book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.

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