When obstacles in life get in the way, whether it’s an illness, a job loss, a global epidemic, or just a lack of credit, many Canadians experience credit issues. Getting back on track can take some time, which might necessitate delaying the purchase of a house.
Some people, however, who may have everything in order and be prepared to purchase a home despite having weak credit, may find that waiting is ineffective.
The good news is that if you’re in that circumstance, you have options and ways to secure a mortgage even with bad credit. The bad news is that they are not always inexpensive. Here are our best suggestions for obtaining a mortgage with bad credit. These options are applicable for first-time home buyers in Canada as well, who are staying in Canada for a period of more than 5 years.
Check Your Credit Score
Your credit score is a significant financial indication in Canada. But how do you initially determine whether you have a poor credit score?
What is Credit Score in Canada?
Your credit score in Canada is represented by a number between 300 and 900 that is given to you by a credit bureau. Equifax and TransUnion are Canada’s two major credit bureaus. This number is used to inform lenders about your prior behavior regarding credit availability. The better your credit score, the more likely you are to get approved for the most affordable mortgage rates.
For your convenience, following is the scale which is normally adapted by Credit Bureaus to decide your credit ratings:
Although the scales are calibrated vividly by different lenders, normally, the one mentioned above is deemed to be universal.
How to Check Credit Score in Canada?
Your credit score can be obtained in a few different ways. First, you can pay Equifax or TransUnion directly for your credit score and credit report (which is a thorough description of your credit history).
It’s worth asking your bank if you don’t want to pay for a thorough credit report. Many banks give consumers the option to perform a certain number of “soft” credit checks for free each year. A “soft” credit check is one that appears on your credit report, is visible to you alone, has no impact on your credit score, and is not reported to any other parties. Knowing your credit score can help you determine if you can obtain a conventional mortgage or if you need to apply for a bad credit mortgage.
It’s crucial to keep in mind that the credit score you acquire could not match the one a prospective lender will obtain on your behalf. Your credit score is calculated differently by each credit bureau, and lenders may use bureaus that aren’t accessible to customers. Fortunately, the variations are typically negligible.
How Bad Credit affects Mortgages?
Here’s an illustration of how your credit score may impact the interest rates on your mortgage and the ensuing monthly mortgage payment. These rates won’t represent the lowest mortgage rates available right now, but the relationship between the various credit score ranges has remained constant throughout time.
Less than 600
5-Year Fixed Rate
Types of Lenders
Monthly Mortgage Payment
The above illustration is on the basis of the ground that you apply for a $500,000 home mortgage with a 5% down payment, amortized over 25 years.
Tips for getting mortgage with bad credit score
You’ve looked at your credit score, and it’s not good. No need to freak out! If you abide by these 5 suggestions, you’ll soon be able to buy a property at an affordable price.
Improve Your Credit Score
A higher credit score is advantageous since it enables you to acquire a lower mortgage rate, which results in reduced monthly mortgage payments, as you can see from the table above. You may want to spend some time raising your credit score if you’ve checked your score and it’s too low to qualify for a mortgage from the big banks (often referred to as “A lenders”). Our best advice for raising your credit score is provided below:
Pay Bills on Time: Never skip a payment on any of your expenses, whether it’s a loan, a utility, or even a phone. Don’t disregard a bill if you are unable to pay it in full because doing so will just result in it becoming delinquent and lowering your credit score. Instead, speak with your supplier about a payment schedule.
Never overuse your Credit Limit: Try not to utilize more than 30% of your credit cards’ or lines of credit’s available credit. This demonstrates to credit reporting organizations that you are a responsible consumer who is not financially strapped.
Never Apply for More Credit: Avoid applying for too many credit cards because this may indicate to credit reporting agencies that you require quick access to funds.
Maintain your Old Accounts: It matters how long your credit history is. Old credit cards can be canceled to remove them from your record and decrease your credit history. To extend the length of your credit history, think about leaving your oldest credit card open, even if you don’t use it.
After a few months, your credit score ought to start to rise if you use this advice to manage your expenses. You can still apply for a mortgage from a trust company or private lender if you need to buy a house before you qualify for an A lender mortgage.
Make Savings to Maximize the Down Payment Amount
When evaluating your application for a mortgage, lenders take into account more than simply your credit score. Additionally, they take into account things like your income, your debt load, and the sum of your down payment. In Canada, 5% of the cost of the home must be put down as a down payment. Since it is riskier to lend to you if your credit is less than stellar, your lender can ask for a larger down payment.
Save 20–25% of your income to put down on a mortgage if you have bad credit. This greater down payment not only demonstrates that you have sufficient financial stability to buy a property, but it also brings down your monthly mortgage cost. Additionally, it means that you won’t be obliged to pay for mortgage default insurance, which is necessary for anyone applying for a mortgage in Canada with less than a 20% down payment. In the event that you stop making payments on your loan, mortgage default insurance, often known as CMHC insurance, safeguards your lender.
The benefits of saving more money for a larger down payment at a mortgage rate of 2.54% are shown in the table below. (It is for a home mortgage worth $500,000 amortized over 25 years)
5% Down Payment
10% Down Payment
20% Down Payment
Mortgage Default Insurance Paid
Total Paid Over 25 Years
Search for a Lender providing Funds on Bad Credit History
In order to be approved for a mortgage by a major bank in Canada, you must have a minimum credit score of 600. Most of Canada’s major banks will not approve you for a home loan if your credit score is below 600.
You will need to find a “B lender” or “subprime lender” if your credit score falls below the bank’s requirement for acceptance of a mortgage. These financial organizations, including trust corporations, mostly operate with clients who don’t have excellent credit. You may even need to engage with a private mortgage lender if you have filed for bankruptcy or submitted a consumer proposal during the previous two years. Your mortgage broker should be able to put you in if you’re dealing with them.
You’ll probably pay some extra fees if you engage with a B lender for your mortgage with bad credit, something you would typically avoid with an A lender. First, a loan processing fee of up to 1% of the mortgage’s value may be assessed by your B lender. Second, you can be charged a fee, often approximately 1%, if you decide to find your lender through a mortgage broker for those with bad credit. Lenders often don’t pay mortgage brokers for customers with bad credit, so the cost is transferred to you in the form of this fee. 2% might not seem like much, but on a $500,000 mortgage, it comes to $10,000.
Take Support of a Co-signer or Joint Mortgage
Having a co-signer on your mortgage is another way to secure a mortgage in Canada with terrible credit. A co-signed mortgage adds a third person as the mortgage’s guarantor. If you are unable to, the co-signer agrees to cover your monthly mortgage payments. Since your co-signer is essentially a co-borrower and their income and credit score are taken into account during the mortgage application process, getting a co-signer can help you access better mortgage rates.
Using a co-signer for your mortgage carries some risks. The co-signer is assuming a significant financial risk for you because they are accountable for your mortgage. Your co-signer is liable if you stop paying your mortgage on time each month. Because of this, most co-signers have some connection to the consignee. As an illustration, your parents might consent to co-sign your mortgage.
There is a risk for you as well. The majority of the time, your lender will demand that your co-signer take on the status of co-owner, which entails having their name appear on the property’s title. Conflicts amongst the co-signers may arise as a result of this ownership stake, particularly when it comes time to sell the house.
Another choice you might take into account is a combined mortgage. Contrary to co-signing a mortgage, a joint mortgage typically involves two or more persons buying and residing in a single home together, however this is not always the case. Joint mortgages include benefits and drawbacks, so be sure to do your research.
Wait for Your Credit Renewal
It can seem impossible to secure a mortgage with negative credit in light of all this dread and gloom! However, there is some good news. At the end of your term, you can renegotiate any mortgage with negative credit. 5 years, which is the average term length, gives you plenty of opportunity to improve your financial status.
Between the commencement of your mortgage contract and the renewal date, try to raise your credit score. You might raise your credit score enough by following the advice given above to go from a B lender to an A lender. You could save hundreds of dollars in interest because the overall interest rate will be reduced as a result of this.
Naturally, there are certain restrictions. By choosing a different lender for your subsequent loan, you won’t be able to get rid of mortgage default insurance if you start a mortgage with it. The same holds true for any extra charges you might incur if you borrow money from a B lender.
No matter how well off you are financially, you should always look around for a lower mortgage rate when it comes time to renew. Simply renewing with your existing lender at a higher rate than you could get elsewhere is a common mistake. To increase your savings, review our advice on renewing a mortgage.
There are choices for people with bad credit who want to qualify for a mortgage, but they are more expensive and will increase the monthly mortgage payment. Consider the reasons behind your poor credit and take action to change the behaviors that contributed to it if necessary. Changing your behavior will help your budget and open up reduced mortgage interest rates at the same time.
The choices we’ve listed above are accessible to you if you want to buy a house but have bad credit. To ensure that your monthly mortgage payments will fit inside your spending plan, carefully study the loan documents.