Do you have goals of buying a house, but your bad credit score is standing in the way? Many Canadians get turned down by their banks when they apply for a mortgage because of low credit. The question is, can you buy a house with bad credit in Canada? If so, how?
Key Points
- It’s possible to buy a house with bad credit in Canada. However, bad credit may get in the way of mortgage approval with traditional lenders.
- If you have bad credit, you may have better luck applying with an alternative mortgage lender.
- Applying for a mortgage with bad credit likely means you’ll be charged a higher interest rate, which will make your mortgage more expensive.
Can You Buy A House With Bad Credit?
Yes, it’s possible to buy a home despite having a bad credit score. Traditional lenders, like banks and credit unions, will typically require good credit. But there are other lending options to consider if you need a mortgage but your credit score is standing in the way.
What’s Considered Bad Credit In Canada?
Your credit score is a tool you can use to gain access to a variety of financial credit products. However, if you have bad credit, it can hinder your ability to get approved and may lead to high interest rates. But what is considered bad credit?
In Canada, credit scores range between 300 and 900. Your credit health will depend on where your credit score falls within this range:
- Excellent – Credit scores above 760
- Very Good – Credit scores between 725 – 759
- Good – Credit scores between 660 – 724
- Fair – Credit scores between 560 – 659
- Bad – Credit scores below 560
Where Can You Get A Bad Credit Mortgage In Canada?
When it comes to purchasing a home in Canada, credit scores are an important factor. But, the good news is that consumers who have less than excellent scores still have options.
Private & Alternative Mortgage Lenders
Private mortgage lenders can be a good option for bad credit consumers who want a short-term solution to purchasing a house. Since private mortgage lenders are not federally regulated, they often don’t require borrowers to meet the same level of criteria that traditional banks require. As such, they’re easier to get a loan from and can serve as a bridge toward a mortgage with a traditional lender.
Keep in mind, however, that this option will likely cost more than a traditional mortgage because of the higher interest rates and lender fees of anywhere from 1% to 3% or more.
Mortgage Brokers
You can also use a mortgage broker to help you find a mortgage lender who accepts bad credit. In fact, some private mortgage lenders are only accessible through a mortgage broker.
This is a great way to quickly find and compare various lenders who are willing to provide you with a mortgage based on your current financial and credit health. Brokers can also negotiate on your behalf to get you the best rate and terms on your mortgage.
What Do Bad Credit Mortgage Lenders Require For Mortgage Approval?
While every bad credit mortgage lender will have a different approval process for their mortgage loans, there are some common factors each lender may look at.
Credit Scores And Credit Report
Credit scores are used by lenders to evaluate a potential borrower’s creditworthiness. The higher a borrower’s credit, the better their chances are of securing a mortgage, one with an affordable rate.
Your credit report will also be used to see who you might owe money to and how you’ve used your credit products in the past. This will give them an idea of how trustworthy you’ll be with your mortgage in the future. While most bad credit lenders will look at your credit, not as much emphasis is put on it as traditional lenders do.
Income And Employment History
Lenders want to be assured of a borrower’s ability to pay them back. Your household income is usually more important than your credit score. So, when you apply, your employment history and financial records will be examined to determine the likelihood of you defaulting on your mortgage.
If your income is “confirmable” through the Canada Revenue Agency’s (CRA) Notice Of Assessment, you’ll have a better chance of securing a better rate. For “non-confirmable” incomes — frequently seen with self-employed and commission-based workers — lenders will need to calculate their average yearly income before making their decision.
Debt-To-Income (DTI) Ratio
Most private lenders will examine your other debts. If a high portion of your income is already going to their other debts, you’ll have less money to pay for the mortgage. This can affect your ability to qualify.
Generally, lenders want a DTI ratio of 44% or lower. However, the exact number depends on the lender. Some may demand a much lower DTI, while others may be comfortable with something slightly higher.
Down Payment
The higher the down payment you’re able to make on a property, the better. Typically, borrowers with good credit are considered lower risk, so down payments as low as 5% of a home’s value (up to $500,000) are accepted.
However, borrowers with poor credit will likely require a down payment of at least 20%. Plus, if you have a credit score of less than 600, you won’t qualify for an insured mortgage. In this case, you’d need a down payment of at least 20% anyway.
On the bright side, if you manage to make a larger down payment, you’ll not only have more home equity and a shorter payment period but you may also be offered a lower mortgage rate.
Property Value
This factor is especially important for potential borrowers with bad credit who are working with subprime or private lenders. Once you find a home to buy, it must be appraised to determine its value. If the lender is skeptical because of your bad credit, they’ll need to be assured that the property is worth the investment they’ll be making.
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READ ARTICLEHow To Improve Your Chances Of Getting A Mortgage With Bad Credit?
While it’s not going to be as easy or affordable for you to purchase a house with bad credit, it is still possible to get a mortgage. Here are a few steps you can take toward securing a high-risk mortgage.
Find Stable Employment
If you have bad credit or have gone through a consumer proposal or bankruptcy, an unstable employment history will only add to a lender’s opinion that you’re a risky investment. For that reason, it’s best to find a stable source of income, especially if you one day hope to work with a prime lender.
Boost Your Income
A raise at work would certainly help to strengthen your income and lower your DTI ratio. But if that’s not possible, consider taking on a side gig to supplement your income and improve your financial strength before applying for a mortgage.
That said, it’s best not to use the entire mortgage amount you qualify for on this income, especially if the raise in income or side gig is temporary.
Look Into Subprime And Private Lenders
As mentioned, while your chances of getting a mortgage with a traditional lender are slim due to their strict requirement, you could work with a private or alternative lender. These mortgage lenders often have lower requirements, making it easier for bad credit borrowers to get approved. Keep in mind, however, that these lenders also charge higher rates and fees.
Save For A Larger Down Payment
The higher your down payment, the less risk your lender will have to take. That’s because you’re buying more equity in the home upfront with a bigger down payment and a lower loan amount relative to the property value. This reduced risk will increase the likelihood of being approved for a mortgage.
Find A Cosigner
A cosigner is basically a guarantor who promises to take responsibility for the mortgage in the event you default on the mortgage. This greatly reduces your risk as a borrower. As a result, adding a cosigner to your mortgage application can help improve your chances of approval and help you gain access to lower interest rates.
Consider Rent-To-Own
A rent-to-own program is an alternative way to get into the housing market if you can’t afford a down payment or are unable to qualify for a traditional mortgage. With this arrangement, you enter into an agreement with the landlord or rent-to-own company, who will “rent” out a home to you. However, the rent not only pays for you to live in the home, but a portion also goes toward a future down payment.
On average, a rent-to-own contract lasts anywhere from one to five years. Once the contract expires, you have the option to either vacate the premises or purchase the home at a previously agreed-upon price.
With every rent payment you make, you can build good credit. Eventually, your credit score may be healthy enough to qualify you for a traditional mortgage.
Pros And Cons Of Getting A Mortgage With Bad Credit
Buying a house with bad credit may be a good idea if you’re financially sound or want to take advantage of a great buy before you’ve had a chance to boost your score. But there are a few drawbacks to applying for a mortgage with bad credit.
Pros
Here are some perks of getting a mortgage with bad credit:
- Buy a home sooner. It can take time to improve your credit score. If you can’t wait, a bad credit mortgage can help you get into the housing market sooner.
- Build home equity. Owning a home lets you build equity over time. The sooner you buy a home, the sooner you can start building equity. You may even decide to use your home equity at some point to cover big expenses. You can do this through loan products like HELOCs (home equity line of credit) or home equity loans.
- Boost your credit score. If you make your bad mortgage payments on time every month, you’ll steadily improve your credit score. At some point, you may boost your score high enough to qualify for a traditional mortgage at a better rate.
Cons
Be sure to weigh the downsides of bad credit mortgages before you apply:
- Higher interest rates. Applying for a mortgage with bad credit will likely leave you with a much higher interest rate than what you may be offered if you had good credit. This is particularly true with alternative lenders, who tend to charge higher interest on their loan products. A higher rate will mean your mortgage will be more expensive.
- Higher fees. Alternative lenders often charge additional and higher fees than traditional lenders.
- Larger down payment may be required. B lenders and private lenders often require larger down payments. You may not be able to qualify with a 5% minimum down payment amount allowed on some traditional mortgages.
Bottom Line
If you’re currently struggling with bad credit and are interested in purchasing a home, working on building a solid financial base and good credit score should be your top priority. Nonetheless, you can still get a mortgage with bad credit. There are plenty of alternative lenders who may be willing to provide you with a mortgage despite your bad credit score if you’ve been turned down by the bank.
Buying A House With Bad Credit FAQs
Can I buy a house with a credit score of 500?
Can I get a mortgage if I had a bankruptcy?
Where can I check my credit scores?
What credit score is considered bad?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
