Clay Jarvis
Beth Buczynski
Getting a mortgage in Canada is hard — even when your credit report is clean enough to eat off of. If your credit is less than perfect, it’s only natural to wonder if entering the housing market is possible. But it is. People with bad credit can still get mortgages.
You won’t be able to find a bad credit mortgage at one of Canada’s Big 6 banks. Instead, you’ll likely be turning to the country’s B lenders and private lenders to secure the financing you need.
These alternative lending solutions can provide a lifeline if you’ve been turned down for traditional financing, but the costs and conditions involved mean they won’t be a fit for everyone.
What’s “bad” credit when applying for a mortgage?
There are a few reasons a lender might consider your credit to be bad or insufficient.
Low credit score
If it’s low enough, your credit score might be the only red flag traditional lenders need to see before turning you down for a mortgage.
Credit scores typically range from 300 to 900. A score of 680 is often high enough to get approved for a mortgage by a large bank, but some alternative lenders may work with you so long as your credit score is 550 or higher.
To be eligible for mortgage default insurance, which is required if your down payment is less than 20%, at least one borrower applying for a mortgage, or a guarantor, must have a minimum credit score of 680.
Your credit score can be low for several reasons, including:
- A failure to pay your creditors on time.
- Overuse of credit.
- Frequent requests for new credit products.
If your credit score is suppressed by any of these habits and is well below that 680 threshold, you may have to look for a lender that offers bad credit mortgages.
A questionable credit report
Even if your credit score is on a steady upward trend, lenders may still interpret any lingering negative events on your credit report as a sign of risk.
Your credit score might improve month-to-month, but your credit report can take much longer to sort out. Late payments, for example, can stay on your credit report for up to six years, as can secured loans and debts sent to a collection agency. A bankruptcy could be on there for seven years.
A lack of credit history
Having a short credit history doesn’t necessarily mean your credit is bad, but you still might need the help of a lender that offers bad credit mortgages.
It’s difficult for lenders to provide a mortgage if you haven’t demonstrated an ability to pay back Canadian creditors. Whether you’re a newcomer to Canada or someone who put off getting their first credit card or line of credit, your short credit history could be an impediment to getting approved for a traditional mortgage.
Where to get a bad credit mortgage
Canada has several alternative lenders, also called B lenders, who offer mortgages to people with bad credit. Because these lenders aren’t federally regulated, their qualification requirements can be more flexible than chartered banks.
Monoline lenders
Some of Canada’s biggest alternative lenders are known as monoline lenders or mortgage finance companies — financial institutions that specialize in funding real estate purchases. You don’t have to have bad credit to get a mortgage from this type of lender, but their less stringent income and credit score requirements make them a viable option if you’ve been turned down by an A lender, like a major bank.
Some large monoline lenders include MCAP, Merix and First National.
Credit unions
Another alternative solution is to apply for a mortgage with a credit union. While credit unions are generally considered A lenders, they are provincially, but not federally regulated, and may not require you to pass a mortgage stress test. This can make it easier to qualify for a larger mortgage amount if your credit score is too low for other A lenders.
Private lenders
If your credit is in especially rough shape, you may need to turn to the private lending space for your mortgage needs. Private lenders range from large, nationwide mortgage investment corporations to individuals providing their capital as a way of making a quick return on their money.
Private lenders, particularly small operators, are loosely regulated, which allows them to set stricter terms and higher interest rates than other B lenders.
» MORE: See our list of Canada’s best mortgage lenders for bad credit
The risks of a bad credit mortgage
With homeownership offering so many perceived benefits, you might feel pressured to buy a house at all costs. Getting a bad credit mortgage can help make that happen, but not without creating some serious risks, including:
- High borrowing costs. Because alternative lenders take on the risk of loaning money to people with bad credit histories, they generally charge higher interest rates than A lenders.
- Large down payment requirements. Alternative lenders often require a minimum down payment of 20% or more.
- Shorter timelines. With many B lenders, your mortgage term might be three years or less. During that time, you’ll be expected to improve your finances so you can move your mortgage to an A lender. If you can’t, you may be stuck paying a higher rate of interest for another several years.
- Losing your house. Borrowing from a private lender may mean increased risk of foreclosure if you fall behind on your mortgage payments.
- Damaging your finances. If it’s been hard for you to manage debt in the past, you might want to hold off on going all-in on what could be the most expensive loan of your life. Not meeting your mortgage obligations or falling behind on your other debts could lead to a bleak financial future.
How to get a mortgage if you have bad credit
1. Check your credit score and credit report
Checking your credit score is useful when preparing for a home purchase. Doing so will give you a general idea of how lenders might view your creditworthiness. If your score is below 680, you might have to start preparing for the risks discussed above.
If your credit score seems unusually low, it’s not a bad idea to view your credit report and see what events are holding it down. You might find an error or a lingering payment that you’ve forgotten about.
This is also a good time to assess whether your credit will be sufficient to get you approved for a mortgage you can afford. Alternative lenders will likely charge you higher mortgage interest rates than the big banks, so it might be in your best interest to improve your credit before applying.
2. Find a mortgage broker with alternative lending experience
If you have bad credit, aligning yourself with the right mortgage broker can make a world of difference. An experienced broker is likely to have relationships with multiple alternative and private lenders, which can help them secure you a better rate.
Part of a broker’s job is to convince lenders that you’re creditworthy, even if certain periods in your credit history say otherwise. Your credit score might be low, but if it’s 100 points higher than it was a year ago, for example, your broker might make the case that your financial habits are trending upward. If a one-time event like a divorce or addiction scarred your credit history, a broker can help lenders see where you and your finances stand today.
Brokers can also help you plan an exit strategy for your bad credit mortgage. If you need to pay off debt or rehabilitate your finances during your mortgage term, a broker can suggest strategies that might work for you.
3. Get pre-approved for a mortgage
No matter what your credit score is, getting a mortgage pre-approval is a must before exploring the housing market.
Getting pre-approved gives you a realistic estimation of how much money a lender might provide. You can’t make a firm offer on a home without a pre-approval since neither you nor the seller will know if you actually have the money to follow through.
A pre-approval can also help you set realistic homebuying expectations. If interest rates are high, for example, you might discover that you have less buying power than you thought. That information can help you adjust your property search, your savings strategies or your approach to paying off debt.
If you’re not ready to get an official pre-approval, a mortgage affordability calculator can give you a general idea of what certain mortgages might cost you. Keep in mind that calculators like these are tools; they don’t indicate how large of a mortgage you might actually qualify for.
4. Compare mortgage offers
Just because you have bad credit doesn’t mean you need to accept the first mortgage offer you’re presented. Your broker may not be able to get a better deal from the lender you choose to work with, but it’s always worth a shot.
If you decide to find an alternative mortgage solution on your own, comparing offers is a must. But make sure you’re not only comparing rates. Get clarity around each product’s fees, terms and total cost to ensure you’re making an apples-to-apples comparison you can trust.
Frequently asked questions about getting a bad credit mortgage
There are several lenders in Canada who provide mortgages to people with credit scores lower than 680, including credit unions, mortgage finance companies and private lenders. These mortgages tend to involve higher interest rates, higher down payment amounts and shorter mortgage terms.
Traditional lenders, like chartered banks, may not lend to you if your credit score is below 680. B lenders, like mortgage finance companies, might offer you a mortgage if your credit score is 550 or higher.
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