Mortgage Basics

Securing a Mortgage With Bad Credit

Securing a Mortgage With Bad Credit
Written by
  • Ashley Howard
| 1 May 2024
Reviewed, 1 May 2024

Table of contents

    A bad or poor credit score is often seen as a major obstacle in obtaining a mortgage. While it’s true that getting a mortgage is usually much more challenging with poor credit, there are ways to still become a homeowner. The reality is that even if your credit score is nearly perfect, it does not always guarantee mortgage approval.

    Bad or poor credit can make getting approved for a mortgage with a traditional A lender difficult. However, alternative solutions, such as B lenders and private lending, are available to assist you in obtaining a mortgage even with a low credit score. This post will provide insight on how you can obtain a mortgage in Canada even if your credit score needs work.

    Key Takeaways

    • Mortgage lenders consider your credit score when assessing your mortgage application, and having a higher score can improve your likelihood of getting approved.
    • While it may be pricier or require a larger downpayment, there are options available for individuals with poor credit.
    • Alternative lenders such as private, monoline, and credit unions are possible choices for those with bad credit.

    The Significance of Credit Scores

    The credit score, a 3-digit numerical representation of your financial reliability, determines your creditworthiness. Credit scores in Canada range from 300 to 900 and are determined by scoring models that consider different elements. These models may differ depending on the credit score provider, their data, and the calculation method utilized.

    Credit scores measure your capacity to pay back borrowed funds, and lenders use them to assess the risk involved in loan requests. A high credit score can result in more favourable mortgage rates and conditions, while a low credit score can restrict your choices and result in higher rates and stricter loan terms.

    “Bad” Credit for Mortgage Applications

    Having a low credit score or a history of credit issues can raise concerns for lenders about your ability to handle your financial obligations. This may lead them to believe that it is too risky to lend money to you, and they may perceive a higher chance of you defaulting on a mortgage. As a result, most A lenders may consider you a high-risk borrower and reject your mortgage request.

    Factors That Could Lead a Lender to View Your Credit as “Bad”

    Various lenders have their own standards for defining a low credit rating. However, certain factors commonly lead lenders to classify a credit score as bad.

    Poor or Bad Credit Score

    Credit scores in Canada range from 300 to 900. Although the credit scoring models utilized by lenders and organizations to pull your score may differ, their main purpose is to forecast the probability of you maintaining timely debt repayments.

    Credit scores below 660 are generally categorized as poor or bad. Scores ranging from 660 to 724 are seen as good, while scores between 725 and 759 are considered very good. Anything above 760 is considered excellent. Lenders, especially traditional banks, may hesitate to approve a mortgage request from an individual with a low or poor credit score.

    Missed or Late Payments

    Your payment history heavily influences your credit score. Consistently failing to make timely payments can greatly harm your credit score, causing many A lenders to hesitate to approve you for a mortgage.

    The record of your payments provides a comprehensive overview of your various credit accounts, such as credit cards, credit lines, loans, and secured loans like HELOCs and mortgages.

    Lack of Credit History

    You may not have an established credit history if you are a newcomer to Canada or new to credit. This does not necessarily imply that you have poor credit. However, the absence of a credit history means that lenders cannot evaluate your past performance in managing debt. This lack of a credit track record can make it challenging for lenders to determine your trustworthiness in paying back debts, which may result in your application being rejected by A lenders.

    As a newcomer to Canada, you may have the option to obtain a mortgage by using your international credit report or a reference letter from your foreign bank, in addition to meeting certain Canadian criteria and depending on the lender and your down payment.

    Excessive Credit Utilization

    Before granting additional credit, lenders are interested in knowing the amount of credit you are currently utilizing. A significant credit utilization ratio could raise concerns for lenders, indicating that you may have excessive debt or potential financial struggles.

    The credit utilization ratio is a numerical representation of the proportion of your credit usage in relation to your overall credit limit. This ratio has an effect on your credit score, with a higher utilization ratio having a negative impact. Experts suggest keeping your credit utilization below 30% to maintain your credit score.

    Collections or Bankruptcy

    Your credit report can contain negative events, such as bankruptcy or collections, that can reflect poorly on your financial habits for a significant period of time. Instances of late payments and debts being sent to collections can remain on your credit report for a maximum of 6 years, while bankruptcy can linger for up to 7 years.

    Credit Report Errors

    It is essential to regularly monitor your credit score and credit report to detect and rectify any errors or inconsistencies that may unintentionally decrease your credit score. This emphasizes the significance of checking for errors in a timely manner to prevent any negative impact on your credit score.

    Finding a Mortgage With Bad Credit

    If your credit score falls below the requirement for getting a mortgage from a reputable lender, there are other options known as alternative lending that can help you secure a mortgage even with bad credit. However, getting approved may entail a larger downpayment and a higher interest rate as a way for the lender to mitigate their risk.

    Private Lenders

    Private Lenders are individuals or organizations that provide financial assistance to borrowers. Individuals or corporations that are not subject to strict regulations can be considered private lenders. They offer mortgages to individuals with limited or non-existent credit history. 

    These lenders specialize in non-income qualified (NIQ) financing for individuals who do not meet A or B lending requirements. 

    This type of financing usually comes with higher interest rates and shorter mortgage terms.

    These loans typically last 3 to 6 months and come with considerably higher interest rates and interest-only repayments. A proper strategy and exit plan are necessary for this borrowing option, as the lender might choose not to renew the mortgage when the term ends.

    Monoline Lenders

    Monoline Lenders are financial institutions that specialize in providing specific financial services, such as mortgages. These lenders focus on one specific area of lending instead of providing a wide range of financial services.

    Monoline lenders may be publicly traded or privately held. They can be categorized as A or B lenders or a combination of both, and each has its own set of credit requirements for approving mortgage applications. Although they also serve borrowers with good credit, some lenders may have more lenient lending standards, making them a desirable choice for individuals with bad or subpar credit.

    Credit Unions

    Credit unions are financial institutions that operate on a cooperative basis and are managed by their members. Unlike federally regulated institutions, they are under the regulation of the province in which they operate, giving them greater leeway in their lending standards. As deposit-taking institutions that are not federally regulated, they are not bound by the stress test requirements for all their offerings, making mortgage approvals more dependent on individual circumstances.

    Dangers of Obtaining a Mortgage with Poor Credit

    Even though obtaining a bad credit mortgage in Canada can be risky, there are many options available for individuals with poor credit. Those seeking alternative lending options to achieve homeownership should be aware of the various risks of obtaining a mortgage with bad credit.

    Higher downpayment – The majority of non-traditional lending options typically require a downpayment of 20% or more. This is significantly greater than the minimum requirement of 5% for mortgages insured by A lenders.

    Increased borrowing costs – Most alternative loan options typically have higher interest rates than A lenders. This is due to the added risk of lending money to individuals with poor or damaged credit.

    Mortgages with Reduced Terms – Numerous non-traditional lenders offer mortgages with shorter terms to those with poor credit. As you may not be able to renew your mortgage at the end of the term, it is important to consider these as a temporary solution while you focus on improving your credit.

    Foreclosure risk – Opting for a higher interest rate and a shorter mortgage term when borrowing may increase the likelihood of being unable to repay the mortgage or needing to extend the term. Failure to make payments or difficulty finding a lender willing to renew the mortgage at the end of the term may result in a higher possibility of foreclosure. 

    Financial Consequences – If you are currently facing difficulties in managing your debt and making timely payments, adding a mortgage to your financial responsibilities could lead to overextension and potentially exacerbate your financial troubles.

    How to Obtain a Mortgage With Poor Credit

    No single solution will work for everyone when it comes to obtaining a mortgage due to bad credit. Nevertheless, certain measures can increase the likelihood of being approved.

    Monitor your credit score regularly and take steps to improve it. While it may take time to see significant improvements, even small changes can positively impact how lenders view you. Consistently making timely payments, reducing your credit utilization, and responsibly managing your current debts can all contribute to an improved credit score. Additionally, frequently checking your credit report can help you identify any inaccuracies or fraud that could potentially lower your score.

    Save more for a downpayment to reduce risk. Having a larger downpayment readily available can increase your chances of being approved for a mortgage. Since most alternative lenders require a higher downpayment, the more you can save, the higher your chances of approval.

    Consider a co-signer or guarantor. A co-signer agrees to take on legal responsibility for mortgage repayments in the event of default. Having a co-signer (who is also listed on the title) or a guarantor (who is only listed on the mortgage) with a good credit score can improve your chances of being approved.

    Get pre-approved or pre-qualified. Pre-approvals provide insight into the amount a lender is willing to loan you, allowing you to establish a budget according to what you can afford. 

    Compare rates and terms. Not all alternative lending options are the same and may have different eligibility requirements. Like traditional mortgages, shopping around can help you secure a lower interest rate or more favourable terms. Before selecting a lending option that suits your borrowing needs, carefully compare any additional fees and consider the total cost of borrowing (COB).

    Frequently Asked Questions

    How low is too low of a credit score for a mortgage?

    The lowest credit score for a mortgage will vary based on the lender and the amount of risk you may be to them. Some alternative lenders may consider mortgage applications from borrowers with scores that are lower than their thresholds if you have significant savings or investments apart from your downpayment.

    I went through bankruptcy can I still get a mortgage in Canada?

    Bankruptcy is likely to remain on your credit report for 6 years, and you will be allowed to discharge it after 7 years. Once the bankruptcy has been discharged, you can work to rebuild your credit. Some lenders may still offer you a mortgage even with bankruptcy on file if you have significant equity or savings.

    What happens if I have no credit history in Canada?

    If you don’t have a credit history in Canada, you may still be able to get a mortgage. Many lenders have mortgage programs specifically designed for newcomers with little or no credit history. You may need to consider a co-signer or guarantor if you’re a citizen. However, if more than 50% of the downpayment or income to support the application is coming from the guarantor they may be required to be a co-signer.

    Final Thoughts

    Obtaining a mortgage in Canada may be challenging for those with poor credit, but it is achievable. Some individuals face difficulties in meeting the requirements due to past financial mismanagement or high levels of debt. To increase your chances of qualifying for a mortgage, concentrate on improving your credit score and consider saving up a higher downpayment amount. 

    Focusing on these two crucial aspects can improve your eligibility for alternative lending options and, eventually, traditional A lenders. With a well-planned mortgage approach, you can effectively work towards rebuilding your credit and securing a suitable mortgage that meets your needs. If you’re ready to explore the lending solutions available to you, reach out today and see how you can compare and save on your mortgage.