How To Get A Mortgage With Bad Credit In Canada

Your credit report is used to show potential lenders how risky you are as a potential borrower. Your credit score is a number from 300 to 900. The higher your credit score, the better credit you have. FICO scores are the most widely used credit scores for evaluating borrower risk. There are five  categories to describe your FICO credit score based on your number. These are the following:

• Poor: 579 and below
• Fair: 580 to 669
• Good: 670 to 739
• Very good: 740 to 799
• Exceptional: 800 and above

It’s important to note that this is just a guideline as each lender has its own credit risk standards, meaning that the ranges will differ. For example, a “good” credit score with one lender might start at 660, while another starts at 721.

Individuals with poor or bad credit are considered a higher risk for borrowing and paying back a loan and therefore will have a tougher time being approved for a mortgage.

There are two credit bureaus in Canada that offer access to your credit report: Equifax and TransUnion. Both companies will allow you to request a free copy of your credit report online.

It’s always a good idea to keep on top of your credit reports. They will show any accounts open or closed on your credit file, credit limits and loan amounts, as well as your payment history including late payments. Keep an eye on these details  and ensure that information is correct and that there are no mistakes.

Note that both Equifax and TransUnion credit files  are updated monthly and that checking your own credit report will not impact your credit score.

The credit score required to qualify for a mortgage will vary depending on the lender. However, as a general rule of thumb, you will need a credit score of at least 680 to qualify with a traditional lender. Anything less is considered too low and risky for a traditional mortgage lender, like one of Canada’s big banks. So, if your credit score is lower than 680, you will have to look to an alternative or private lender for a mortgage.

A bad credit score will impact your chances of being approved for a mortgage in two ways.

The first is in the actual approval itself.. As said above, traditional lenders will require a credit score of at least 680 in order to be considered for a mortgage. Lenders view good credit as a sign that you will make your mortgage payments regularly and eventually pay off your mortgage. They view poor credit as a sign that you could default on the loan. So, if your credit score is under the 680 threshold, you may be deemed too risky and may not qualify, which means you will then need to go to an alternative or “B” lender.

The second way in which your credit score impacts your mortgage is the interest rate. Lower credit scores are associated with higher borrowing risks, so if you are denied a mortgage from a big bank, and have to look at an alternative lender, you’ll likely be charged a higher interest rate because the higher rate makes up for the increased risk the borrower is taking by extending a mortgage loan to you.
While there are other factors that lenders take into consideration when assessing your loan request, such as your employment status, debt-to-income ratio, existing debt and how you plan to use the property you are needing the mortgage for, credit score does play a very big role in mortgage approval.

If you have bad credit it will be difficult to qualify for a mortgage. That being said, it’s not impossible to be approved.

Have a Larger Down Payment

One way to help get approved for a mortgage even if you have bad credit is to have a larger down payment for your home. In Canada, you need at least 5% down payment to buy a house, which is a very small percentage. I A higher down payment, is less money that you need to borrow which looks more favorable to potential lenders.

Look at Alternative Lenders

A bad credit score may mean you are turned down by traditional lenders (such as the big banks of Canada) but there are still other options out there. Other types of lenders to consider when looking for a mortgage include:

• Credit unions
• Caisses populaires
• Mortgage companies
• Insurance companies
• Trust companies
• Loan companies

Lenders that fall outside of the traditional bank are called, “B lenders” or “alternative lenders”. They are more flexible and less strict than the big banks. However, the flexibility offered by alternative lenders tends to come with higher interest rates, which is something to keep in mind.

Consider a Co-signer or a Joint Mortgage

Another option to consider is adding  a co-signer to your mortgage or to apply for a  joint mortgage. In this circumstance, you will sign a mortgage agreement with another person (or even multiple people). This can make it easier to be approved, but joint borrowers are all equally responsible for then paying the borrowed amount. As such, this can be pretty risky. You would need to be confident in the individual you co-sign with (and they in you) for this  strategy to work out for everyone.

Improve your Credit Score

While the steps above will help you improve your chances of being approved for a mortgage with bad credit, if possible, it might be in your best interest to wait and work on improving your credit score and then trying again. This will make it easier to be approved and you’ll be able to find lower interest rates. If you are looking to improve your credit score, there are several steps you can take, including the following:

• Work on paying off your debt. If you need to, you can look to a balance transfer credit card to reduce your interest rates or consider a debt consolidation loan.
• Pay your bills in full and on time every month.
• Don’t apply for too many credit cards.
• Keep an eye on your credit card balance and don’t use too much of your available credit.
• Look for inaccuracies on your credit report.

Getting a mortgage with bad credit is not impossible, but it is difficult and will cost you more. If you can afford to wait a while, it’s in your best interest to take some time and build your credit history, while raising your credit score and reducing your debt-to-income ratio. Not only will better credit make it easier to be approved, but it will also keep your interest rates lower.