Getting a Bad Credit Mortgage in Canada
If you have what’s considered bad credit, 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. You can turn to the country’s B lenders and private lenders instead, but the costs and conditions involved with a bad credit mortgage mean they won’t be a fit for everyone.
What is “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 500 or higher.
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 sub-optimal 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 delayed getting a first credit card or line of credit, a short credit history could be an impediment to getting approved for a traditional mortgage.
How to get a mortgage if you have bad credit
1. 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 alternative and private lenders who work exclusively with brokers, so they may have access to offers you can’t find on your own.
A broker 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.
2. Boost your down payment if possible
Most alternative lenders will require someone with a low credit score to make a down payment of at least 20%. It’s best to prepare for this major cost sooner rather than later.
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, which can help you set realistic homebuying expectations.
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.
4. Compare mortgage offers
Just because you have bad credit doesn’t mean you need to accept the first mortgage offer you’re presented. Speak to more than one broker to ensure you’re being presented with the largest number of mortgage rate offers.
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.
Where to get a bad credit mortgage in Canada
Institution | Features | Examples |
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Monoline lenders |
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Credit unions |
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Private lenders |
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Frequently asked questions
Can I get a mortgage in Canada if I have bad credit?
Can I get a mortgage in Canada if I have bad credit?
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.
What’s the lowest credit score for a mortgage in Canada?
What’s the lowest credit score for a mortgage in Canada?
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 500 or higher.
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Clay Jarvis
Clay Jarvis