Many Canadians encounter credit issues when life’s hurdles get in the way, whether it’s an illness, a job loss, a global pandemic, or just a lack of credit. It can take some time to get back on track, which could mean putting off the purchase of a home.
Waiting may not work for some though, who – other than poor credit – may have all their ducks in a row and are ready to take the homeownership plunge.
The good news is there are ways to get a mortgage with bad credit, as well as other options if you’re in that situation. The bad news is they don’t always come cheap. Here are our top tips on how to get a bad credit mortgage.
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’ve dealt with available credit in the past. The higher your credit score the better, because a high credit score helps you qualify for the lowest possible mortgage rates.
*These categories will 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 directly to the source and pay for your credit score and credit report (which is a detailed accounting of your credit history) from Equifax or TransUnion.
If you don’t want to spend the money on a detailed credit report, you can also check it for free using RateHub.ca’s free credit score tool. Once you know your credit score, you’ll have a clearer idea of whether you’ll qualify for a traditional mortgage, or whether you’ll need to apply for a bad credit mortgage.
It’s important to note that the credit score you receive might be different from the score that a potential lender will pull on your behalf. Every credit agency uses a different calculation to work out your credit score, and lenders sometimes use agencies that aren’t available to consumers. Fortunately, the differences tend to be minor.
Find the best credit cards without impacting your credit score
Here’s an example of how your credit score could affect your mortgage interest rates and subsequent monthly mortgage payment. Whiles these rates won’t be indicative of today’s lowest mortgage rates, the relationship between the different credit score ranges is consistent over time.
|5-Year Fixed Rate||2.54%||5.19%**||10-18%|
|Types of Lenders||Major banks||Trust companies||Private lenders|
|Monthly Mortgage Payment*||$2,223||$2,927||$4,419|
*For a $500,000 home with a 5% down payment, amortized over 25 years. **Home Trust
5 tips for getting a mortgage with bad credit
So you’ve checked your credit score, and it doesn’t look good. There’s no need to panic! Follow these 5 tips, and you’ll be on your way to affordable homeownership in no time.
1. Improve your credit score
As you can see from the table above, a higher credit score is beneficial because it helps you secure a lower mortgage rate, which results in lower monthly mortgage payments. If you’ve checked your credit score and it’s too low to qualify for a mortgage from the big 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 any of your bills, including debt payments, utilities, even your cell phone bill. If you can’t pay the bill in full, don’t ignore it, as that will just cause it to go into delinquency, harming your credit score. Instead, contact your provider 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 credit reporting agencies that you are a responsible spender and not over-extended.
- Don’t apply for too much new credit: Don’t apply for too many credit cards, as this can be a red flag to credit reporting agencies that you need cash fast.
- Keep your oldest account: The length of your credit history matters. Canceling old credit cards removes them from your file and shortens 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 increase after a few months. If you need to purchase a home before you qualify for an A lender mortgage, you can still apply for a mortgage from a trust company or private lender (see point 3 below).
2. Save a larger down payment
Lenders look at more than just your credit score when considering your mortgage application. They also consider factors like your income, your debt levels, and the size of your down payment. In Canada, the minimum down payment amount is 5% of the home’s purchase price. If your credit is less than ideal, your lender may require a higher down payment, since it is riskier to lend to you.
Consider saving a 20-25% down payment for a bad credit mortgage. Not only does this larger down payment signal that you are financially stable enough to own a home, but it also lowers your monthly mortgage payment. It also means you won’t have to pay for mortgage default insurance, which is required for anyone getting a mortgage in Canada with a down payment of less than 20%. Mortgage default insurance (also called CMHC insurance) protects your lender in the event you default on your loan.
The table below illustrates the benefit of saving a larger down payment at a mortgage rate of 2.54%.
|5% Down Payment||10% Down Payment||20% Down Payment|
|Mortgage Default Insurance Paid||$19,000||$11,900||$0|
|Total Paid Over 25 Years||$666,842||$626,278||$539,953|
*For a $500,000 home amortized over 25 years.
3. Find a bad credit mortgage lender
You need a minimum credit score for mortgage approval in Canada from a big bank, and that number is 600. If you have a credit score below 600, most of Canada’s big banks will not approve you for a mortgage loan.
If you don’t meet the bank’s threshold for the minimum credit score for mortgage approval, you’ll have to look for a ‘B lender’ or ‘subprime lender’. These financial institutions, including trust companies, work almost exclusively with people that do not have ideal credit scores. If you’ve gone through a bankruptcy or consumer proposal within the last two years, you may even need to work with a private mortgage lender. If you’re working with a mortgage broker, they should be able to put you in touch with a lender they know will work with you.
|Description||Credit Score*||Mortgage Rates**||Example Lender|
|Major Banks – Prime Lenders||Financial institutions, including the big banks with more conservative lending requirements.||600-900||2.54%||TD Bank|
|Trust Companies – Bad Credit Institutional Lenders||Financial institutions catering to those with bad credit||550-700||5.18%||Home Trust|
|Private Lenders||Private companies or individuals who loan funds backed by real estate properties||<600||10-18%||WealthBridge Corporation|
*The exact cut-offs will vary by lender
**Other factors will also influence your mortgage rate
If you work with a B lender for your poor credit mortgage, you’ll most likely pay some extra fees that you would normally avoid with an A lender. First, your B lender may charge a loan processing fee of up to 1% of the mortgage’s value. Second, if you choose to find your lender through a poor credit mortgage broker, they may also charge you a fee, usually around 1%. This fee is levied because lenders don’t typically compensate mortgage brokers for bad credit mortgage clients, so the cost is passed along to you. 2% may not sound like much, but it amounts to $10,000 on a $500,000 mortgage.
4. Consider a co-signer or joint mortgage
Another option for how to get a mortgage with bad credit in Canada is to have a co-signer on your mortgage. A co-signed mortgage brings on a third party as a guarantor of the mortgage. The co-signer promises to pay your monthly mortgage payments if you can’t. Getting a co-signer for your mortgage will help you access better mortgage rates because your co-signer is essentially a co-borrower, so their income and credit score are considered during the mortgage application process.
There are a few risks to using a co-signer for your mortgage. First, since co-signer is responsible for your mortgage, they are taking a big financial risk for you. If you stop making your monthly mortgage payments, your co-signer is financially responsible. For this reason, most co-signers are related to the consignee. 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 part-owner of the home, which means their name will be on the title of the property. This ownership stake can lead to conflicts between the co-signers, especially when it comes time to sell the home.
A joint mortgage is another option you could consider. Unlike co-signing a mortgage, a joint mortgage generally sees two or more people own and live together in a single home, though not always. There are advantages and disadvantages to joint mortgages, so be sure to do your research.
With all this doom and gloom, it might seem like there are no good options for getting a mortgage with bad credit! There is some good news, however. Any bad credit mortgage can be renegotiated at the end of your term. Most terms are 5 years, which is plenty of 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 outlined above, you could improve your credit score enough to move from a B lender to an A lender. This will result in a lower interest rate overall, which could save you thousands of dollars in interest.
There are a few caveats, of course. If you start a mortgage with mortgage default insurance, you won’t be able to get rid of it by switching lenders for your next contract. The same goes for any additional fees you’re charged if you borrow from a B lender.
No matter what your financial position is, you should always shop around for a better mortgage rate when you renew. A common mistake is simply renewing with your current lender at a higher rate than you could qualify for elsewhere. Read our tips on renewing a mortgage to maximize your savings.
The bottom line
While there are options when qualifying for a mortgage with bad credit, they are more expensive and will result in a higher monthly mortgage payment. If you have bad credit, it’s important to consider why that is, and take steps to alter the habits that resulted in a low credit score. Changing your habits will simultaneously improve your finances and give you access to lower interest rates for your mortgage.
If you’re looking to buy a house with bad credit, the options we’ve outlined above are available. Be sure to read your loan documentation thoroughly, and run the numbers to make sure your monthly mortgage payments will be within your budget. You can use our mortgage affordability calculator to figure out how much you can comfortably afford to spend on a home.