If your goal is to buy a home, you’ll need a mortgage to finance the purchase, which means having a good credit score is vital. The higher your credit score, the better the mortgage options you’ll have access to, including favourable interest rates.
On the other hand, having bad credit when shopping for a mortgage will make things more challenging. Lenders will perceive you as an irresponsible and unreliable borrower. They’ll be hesitant to approve your mortgage application for fear that you won’t be able to handle the payments.
However, the good news is it’s still possible to get a mortgage with poor credit in Canada. It’s an obstacle, but you can overcome it with careful planning, research, and help from the right lender. In this article, we’ll cover tips and strategies to put the odds of securing a bad credit mortgage in your favor.
What does it mean to have “bad credit” when applying for a mortgage?
Bad credit signals to lenders that there’s a high chance you’ll fail to make timely payments on your loan, in this case, a mortgage. As a result, few lenders will be willing to lend you money for a home purchase, given the elevated risk of you defaulting on the loan.
Two tell-tale signs of bad credit are a low credit score and poor credit history.
Low credit score
Credit scores that are 700 or higher are widely considered to be good. If you fall into this category, you can obtain a mortgage from a traditional financial institution like one of Canada’s top banks. This is a huge deal, as financial institutions like TD, CIBC, and RBC offer the most competitive mortgage rates and favourable terms and conditions.
Scores from 650 to about 699 are considered fair. You shouldn’t experience too many issues securing a mortgage from a traditional lender if you belong in this range. Anything below 650 is below average, meaning that qualifying for a mortgage from a major bank will be more difficult (though still possible).
If your credit score is below 600, there’s virtually no chance for you to get a mortgage from a traditional lender. Instead, you’ll need to turn to the alternative lending market, which includes B lenders and private lenders (which we’ll describe later in this guide). When your score dips below 600, you will be eligible only for bad credit mortgages.
Note: To get an insured mortgage in Canada, you’ll need a credit score of at least 600. The Canada Mortgage Housing Corporation (CMHC) (as well as alternative mortgage insurance providers, like Sagan) will insure mortgages only if the borrower has a minimum 600 credit score.
Poor credit report
Even if your credit score is in decent shape, mortgage lenders may still view your credit report negatively if it’s teeming with unfavourable data, such as:
- Past-due payments
- Closed accounts due to payment defaults
- Accounts sent to collection agencies
- High credit utilization
- An abnormally high number of credit inquiries
It may take years for these adverse events to disappear from your credit report. For example, late payments and loans sent to a collection agency can remain on your report for up to six years.
How bad credit affects your ability to get a mortgage
While getting a mortgage with bad credit in Canada is still possible, you must be humble and set realistic expectations.
As a borrower with a less-than-ideal credit score or credit history, you’ll likely face higher interest rates , steep fees, and possibly stricter conditions. Extended terms (five years or more) are rare for bad credit mortgages, and you may also need to contribute a larger down payment. If you’re refinancing, your lender may only approve your application if you have sufficient home equity.
How to get approved for a mortgage with bad credit in Canada
As mentioned, traditional banks and credit unions will turn you down for a mortgage if you have bad credit, especially if your credit score is below 600. Luckily, there are other options you can explore to get the financing you need. Here are a few to look into.
Get a co-signer or guarantor
A co-signer is an individual who agrees to assume legal responsibility for mortgage payments if you default. When they sign their name on the dotted line, they act as backup for the loan, easing some of the lender’s financial risk. As a result, your mortgage application stands a higher chance of getting approved.
Naturally, whoever you ask to be your co-signer should have a glowing credit history and earn a high, stable income. It should also be someone you can trust and have known for a long time, such as a family member or friend. The co-signer’s name doesn’t usually appear on the property’s title, meaning they don’t retain ownership rights over the home (though this can be arranged if desired).
Getting a guarantor is an alternative option to a co-signer. The role of a guarantor closely resembles that of a co-signer in that they share liability for the mortgage payments with you. However, the lender will only pursue them for payment if they’ve exhausted all means of collecting your money first. In contrast, the lender may chase a co-signer for past-due mortgage payments much earlier. In addition, a guarantor has no stake in the property, as they’re not listed on the title.
While a co-signer or guarantor can give you the extra push you need to qualify for a mortgage, there are risks if you fail to maintain your payments. Suppose they must step in and cover your missed payments. In that case, the situation can turn sour, leading to nasty conflicts and confrontations. You risk permanently damaging your relationship with them.
Apply with a B lender
A B lender is an alternative to traditional mortgage lenders (known as A lenders), such as CIBC and TD, who cater to customers with solid credit ratings and reliable incomes. B lenders have more relaxed qualification criteria for mortgages, so they’re more willing to accept those with a subpar credit profile. However, they typically charge higher interest rates and ask for a down payment of at least 20%.
Some B lenders deal exclusively with CMHC-insured mortgages, so you’ll need a minimum credit score of 600 to qualify. But others have mortgage products solely dedicated to those with scores below 600. B lenders are not legally bound by mortgage lending regulations that govern federally regulated banks. Still, many follow them voluntarily, namely the B-20 guidelines for residential mortgages.
A common class of B lenders are monoline lenders. These financial institutions focus specifically on mortgage lending rather than the wide range of products banks offer. Some examples are Merix Financial, First National, MCAP, Radius Financial, and Home Trust.
Pro tip: Consider hiring a mortgage broker to assist you in finding a bad credit mortgage lender. A qualified and experienced mortgage broker has access to a wide range of B lenders—they know how and where to land the best deals. Some B lenders don’t deal with customers directly, preferring to sell their products exclusively through brokers, so working with a mortgage broker can expand your options.
Apply with a private lender
If you have no luck getting a mortgage from a B lender, you may need to approach a private lender instead.
Qualification requirements for a private lender are lower than B lenders, so you could obtain a mortgage even with a sub-600 credit score. Rather than focusing solely on your credit score, private lenders emphasize other factors such as income and home equity. They also don’t observe any government regulations, including the B-20 guidelines that B lenders tend to follow. Combined with the lack of “red tape” and flexible lending options, a private lender is the easiest path for acquiring a mortgage if your credit is in the dumps.
However, there are many risks in working with a private mortgage lender to finance your home purchase. These include exceptionally high interest rates (higher than B lenders), hefty fees, and a very low tolerance for late payments, which can quickly lead to foreclosure.
Consider a rent-to-own home
A rent-to-own agreement is an alternative path for home financing that’s been gaining traction lately in Canada, especially for those with impaired credit and limited ability to put down a large down payment. It works as follows:
- You enter into a contract with a property owner to buy a home at a future date or have the option to do so. The contract consists of two phases: the lease phase and the purchase phase.
- During the lease phase, you rent the property for a defined time frame, typically a few years. The owners set aside a portion of the payment as a rent credit, which you can use as your down payment when purchasing the property.
- At the end of the lease phase, you buy the property from the owner, using your rent credits as part of your down payment. You’ll need to secure a mortgage to finance the rest of the purchase.
A rent-to-own arrangement allows you to live in the home you expect to buy while you build up your credit and save for a sizable down payment. It’s a great way to get settled into your property ahead of time.
However, you may have to pay a higher-than-average rent fee for this privilege. There’s also no guarantee you’ll qualify for a mortgage when the agreement expires. You could face stiff penalties if you backpedal your promise to buy the property.
Save for a larger down payment
If you have bad credit, your chances of getting approved for a mortgage are higher if you contribute a sizable down payment. The more money you offer to your lender upfront, the more you reduce their risk. Aim for a minimum of 20% to 25% down payment.
If you have little disposable income or are struggling with a tight budget, hitting your down payment target may prove challenging, if not impossible. But if you can find a way to put extra funds towards a down payment, you’ll boost your chances of qualifying for a mortgage at a lower rate.
Improve your credit score
Suppose you still can get approved for a mortgage despite approaching every lender you can find. In that case, there’s still hope. But you’ll have to put your homeownership plans on hold for a while and work to strengthen your credit score. As your credit standing improves, your borrowing options will expand, as you’ll appear less risky to lenders.
The best way to boost your credit score is by making on-time payments on your bills and debts. Your payment history constitutes 35% of your overall credit score, so do everything you can to avoid paying late or missing payments.
You may need to adjust your spending habits to keep up with payments. Review your budget to see where you can reduce expenses to free up more cash flow. Check out our articles on money management strategies to get your finances in order and improve your credit:
- DIY Debt Relief Strategies: 10 Ways to Get Your Finances in Order
- How to Manage Debt When Living Paycheque to Paycheque
Credit utilization is another crucial factor that greatly impacts your credit, contributing to about 30% of your overall credit score. Naturally, the less debt you carry, the less likely you are to default on your payments, so minimize using credit cards and lines of credit. We recommend keeping your credit utilization below 30%.
How does a bankruptcy on your credit report affect your mortgage application?
Bankruptcy has a harsh impact on your credit standing. Declaring bankruptcy can cause your credit score to dip by 200 points or more, even with a spotless credit history. Furthermore, a bankruptcy filing will stay on your credit report for six or seven years.
However, you shouldn’t despair if you’ve been through bankruptcy. It’s possible to obtain a mortgage after bankruptcy, even after as little as 1.5 to 2 years. By diligently working to get your financial house in order, you can rebuild your credit score and present yourself as an appealing borrower. At the minimum, you’ll have a chance to get a mortgage through a B lender or private lender.
Can I get a mortgage with no Canadian credit history?
Having no credit history isn’t the same as having bad credit, but it’ll still hamper your efforts in getting a mortgage. Since lenders have no credit history available to judge how responsible you are at handling debt, they’ll be reluctant to approve your mortgage application.
Luckily, there are opportunities in Canada to qualify for a mortgage if you lack a credit history. A few large financial institutions offer programs for those with little to no credit history, including newcomers to Canada. Some examples are RBC and BMO.
Other lenders may accept credit history from another country if you recently arrived in Canada and want to finance a home purchase. In some cases, your lender may ask for a co-signer before approving your application to reduce their risk.
The bottom line on getting a mortgage with bad credit in Canada
Having bad credit will hamper your ability to get a mortgage in Canada, but it’s still an achievable goal. You’ll just have to put more time and effort into finding a lender and getting approved.
First, check out your current credit score and credit report to determine where you stand financially (you can get this information from Canada’s credit bureaus, Equifax and TransUnion) and identify areas for improvement. Work on lowering your existing debts, increasing your income, and saving up for a down payment. When you feel confident approaching lenders, start with those in the B lending market, as they offer lower mortgage rates than private lenders.
If you’re having trouble getting approved no matter where you turn, that’s a sign that you may need to delay getting a mortgage. In this case, rejection is a good thing—you don’t want to take on a mortgage you can’t afford out of desperation. The result could mean defaulting and losing your home. Instead, focus on repairing your credit score, saving additional funds for a down payment, finding a co-signer, etc.
Many Canadians struggle to qualify for a mortgage due to existing debt obligations. Too much debt contributes to a lower credit score, especially if you routinely miss payments. As a result, reducing your debt burden can help you build a solid foundation to enhance your credit and increase your chances of qualifying for a mortgage in the future.
Luckily, there are several ways to find debt relief in Canada. As Licensed Insolvency Trustees, we can help you get a handle on your credit cards, payday loans, lines of credit, and other debts holding you back from getting a mortgage. Contact us for a free, no-obligation consultation to explore options for ending your debt woes.Contact David Sklar