Your credit history is one of the most critical factors when applying for a mortgage in Canada. Whether you’re a first-time homebuyer or looking to refinance, your credit score and financial history significantly affect the type of mortgage options available to you. But what happens if you have bad credit? Can you still qualify for a mortgage, and if so, what are your options?
What is Considered Bad Credit?
Credit scores range between 300 and 900, with 600 generally considered the dividing line between “good” and “bad” credit. A credit score of 680 or higher is considered strong and is more likely to get you favorable mortgage rates and terms. A score below 600, however, can make it more challenging to qualify for a mortgage with traditional lenders like banks.
Common factors that lowers your credit score include:
- Missed or late payments on credit cards, loans, or bills
- High credit utilization, where you’re using a large portion of your available credit
- Defaulting on loans or going into collections
- Declaring bankruptcy or undergoing consumer proposals
If any of these issues are present on your credit report, lenders will view you as a higher risk, which can limit your mortgage options.
How Bad Credit Affects Your Mortgage Options
Having a poor credit score doesn’t automatically disqualify you from getting a mortgage, but it does reduce the options available to you and often leads to higher costs. Here are the primary ways bad credit can impact your mortgage process:
Higher Interest Rates
Traditional lenders like major banks typically offer the lowest mortgage interest rates, but they reserve those rates for borrowers with good scores. If you have a below the perect credit rate, lenders will see you as a higher risk, which means you’ll likely be offered a higher interest rate.
Smaller Loan Amounts
Bad credit may limit the amount of mortgage financing you qualify for. Lenders typically use your debt-to-income ratio (the amount of debt you have compared to your income) to determine how much you can afford. If you have bad credit, your loan amount may be lower than you expect, as lenders will want to minimize their risk exposure.
Larger Down Payment Requirements
While the minimum down payment for a mortgage in Canada is usually 5% for the first $500,000 of a home’s purchase price, borrowers with low credit score may be required to make a larger down payment which could be of 20% or more if your credit is less than ideal, which can put homeownership out of reach for some buyers.
Fewer Lender Options
Many traditional lenders, including major banks, follow strict credit requirements. If your score falls below a certain threshold, they may decline your mortgage application outright. However, alternative lenders, such as private lenders or mortgage brokers, may still be willing to work with you, albeit with less favorable terms.
Types of Mortgage Solutions for Bad Credit Borrowers
Even if you have bad credit, there are bad credit mortgage options available to help you secure the home financing you need:
Bad Credit Mortgages: Some lenders specialize in bad credit mortgages, which are specifically designed for borrowers with credit issues. These lenders focus less on your credit score and more on your income, assets, and down payment.
Private Lenders: Private lenders work with individuals who hold poor credit or are self-employed, as they are less concerned with credit scores and more focused on the overall value of the property. It comes with higher interest rates, making them a temporary solution while you work on improving your credit.
Subprime Mortgages: Subprime mortgages are another option for borrowers with bad credit. These loans cater to individuals who don’t meet the traditional requirements set by prime lenders. While subprime mortgages can provide you with financing when you need it, they often come with much higher interest rates, making it essential to weigh your options carefully.
Co-signer Mortgages: If you’re struggling to qualify for a mortgage on your own due to bad credit, adding a co-signer with good credit can help. However, this can be a significant responsibility for the co-signer, as their credit score can be affected if you fail to make payments.
How to Improve Your Mortgage Chances with Bad Credit
Even if you have bad credit, you can take below steps to qualifying for a mortgage:
- Increase Your Down Payment – A larger down payment reduces the lender’s risk, making you more likely to get approved even with bad credit.
- Pay Down Debt – Reducing your outstanding debt can improve your credit score, which is favorable to lenders.
- Improve Your Credit Score – Consistently making on-time payments and reducing your credit utilization over time can boost your credit score, giving you access to better mortgage options in the future.
- Hire a Mortgage Broker – Mortgage brokers have access to a wide network and can help you find a mortgage tailored to your specific needs, even if you have bad credit.
- Get Pre-approved – Pre-approval for a mortgage helps you understand the loan amount and terms you can expect, which can guide your home search more effectively.
Conclusion
Having bad credit can limit your mortgage options in Canada, but it doesn’t have to prevent you from becoming a homeowner. While traditional lenders may offer limited choices, alternative lenders, private lenders, and specialized bad credit mortgage products can provide viable solutions. By improving your financial situation and working with a trusted mortgage broker, you can navigate the challenges of bad credit and secure a mortgage that fits your needs.
