According to TransUnion, roughly 2.6 million Canadians are considered “subprime” borrowers, or those with credit scores under 640. Borrowers in this category may find it difficult to get approved for a mortgage given the stringent criteria required. For these Canadians, applying for a subprime mortgage may prove much easier.
What exactly is a subprime mortgage, and is it something you may want to consider if you’re unable to get approved for a regular mortgage because of poor credit or unhealthy financial profile?
Key Points
- A subprime mortgage is designed for borrowers with bad credit, low income, or a high debt level.
- Subprime mortgages come with higher interest rates, making them much more expensive than standard mortgages.
- Subprime mortgages are offered by ‘B lenders’ whose lending requirements are much less strict compared to traditional lenders, like banks.
What Is A Subprime Mortgage?
Subprime mortgages are issued by mortgage providers known as “B Lenders”. These lenders specialize in home loan products for borrowers with lower credit scores or those who may be unable to secure a mortgage from “A Lenders,” like traditional banks and credit unions.
In Canada, subprime mortgages are relatively easy to get. Working with a mortgage broker is an ideal way to get connected to a B Lender to acquire a subprime mortgage to help finance a home purchase. Brokers work with a wide network of lenders, many of which work specifically with subprime borrowers.
| Note Subprime mortgage lenders that offer these loans are more exposed to more risk of not recouping their investment. To make up for this added risk, lenders typically charge a much higher interest rate and offer less favourable terms on subprime mortgages compared to conventional home loans. Plus, you need to make a down payment of at least 20% of the purchase price on subprime mortgages, as insured home loans are not offered. |
Benefits Of A Subprime Mortgage
There are many reasons why some borrowers take out subprime mortgages:
Easier Approval
Subprime mortgages are easier to get approved for than traditional banks. As mentioned, those with poor credit can qualify, given they meet the lenders other requirements. Most subprime mortgage lenders base their approval on the borrower’s overall financial health.
Lower Barriers To Entry
Without a subprime mortgage, you might not be able to secure financing to purchase a home if you have poor credit or non-traditional source of income.
Moreover, you may be able to avoid the mortgage stress test by working with a private subprime mortgage lender as they are not federally regulated.
Build Healthy Credit
One of the best ways to build a good credit profile is to make timely payments on a loan or credit product. But it can be difficult to get a loan at all without a good financial profile. Subprime mortgages offer an opportunity to access credit and use it responsibly to build credit with timely payments.
Risks Of Getting A Subprime Mortgage
Subprime mortgages may help low-credit borrowers secure a loan without having to meet stringent qualifications, but there are some risks that should be considered:
High-Interest Rates
The interest rates that come with subprime mortgages are much higher compared to regular mortgages. Even a 1% difference in interest rates can add thousands of dollars to the loan over its lifetime. Moreover, a higher interest rate means higher monthly payments.
Risk Of Default
While subprime mortgages are easier to qualify for, you may be at higher risk of loan default if you take out a large loan amount at a high rate. This could prove difficult for you to pay off, especially if you haven’t made improvements to your financial habits. Missing payments and becoming delinquent on your mortgage could put you at risk of having your home seized by your lender.
Expensive Fees And Closing Costs
All mortgages come with closing costs, but those affiliated with subprime mortgages tend to be higher than regular mortgages. That means the loan will cost more over the life of the mortgage. B Lenders try to get borrowers to pay as much money upfront as possible to balance the increased risk of default.
How To Apply For A Subprime Mortgage
Applying for a subprime mortgage is similar to applying for a regular mortgage. To apply for a subprime mortgage, following these steps:
Check Your Credit Score
Since your credit score plays a direct role in your ability to secure a mortgage and the interest rate you’ll be charged, it’s helpful to know where you stand. You can check your credit score for free using Loans Canada’s CompareHub tool.
Once you know your score, you can either take some time to improve it (if necessary), or look for a lender willing to extend a mortgage to you despite your low score.
Find A Lender
One of the first things you’ll want to do is find a lender to work with. Your best bet is to use a mortgage broker or an online aggregator to find and compare lenders and get quotes.
Based on the information you provide about your credit health and financial profile, you’ll get a list of lenders and loan offers. From there, you can compare each offer and narrow down your options.
Before settling on a lender, look into their background and credentials to ensure they are legitimate.
Complete An Application
Whether you work with a mortgage broker or apply directly with a lender, filling out a mortgage application is required. Ensure the application is complete and all information provided is accurate and up-to-date to avoid any hiccups and delays.
Submit Required Documentation
Once you choose a lender, they’ll want to see documentation regarding your finances before deciding on the loan amount you can get approved for, the terms of the mortgage, and the interest rate charged.
Documentation required may include any of the following:
- Photo identification (driver’s license, passport, etc)
- Tax returns
- Bank statements
- Pay stubs
- Letter of employment
- Statement of assets and liabilities
- Purchase agreement after offer acceptance
The documents requested by your lender will have to be submitted along with your mortgage application. The lender will use all the information you’ve provided to assess your debt-to-income (DTI) ratio, loan-to-value (LTV) ratio, and the property itself.
Depending on your exact situation, you may need to provide additional documents before the lender’s decision. For instance, if you’re self-employed or are collecting non-employment income, you may need to supply supporting paperwork unique to these situations.
What To Look For In A Subprime Mortgage Lender
The subprime mortgage industry may have a few bad apples in the bushel. That’s why it’s important to vet the lender you plan to work with to ensure that they are not predatory and are financially capable of providing the loan amount you require.
Here are a few things to look for in a subprime lender:
They Properly Vet Borrowers
Even though B lenders may have less stringent loan requirements, a vetting process is involved. A trustworthy lender will want to ensure that a borrower is capable of repaying the loan and won’t get trapped in a cycle of debt.
You don’t want to work with a lender who will approve you for a loan you can’t afford. This will make your financial situation worse and put you at risk of defaulting on the mortgage, potentially leading to foreclosure and other financial issues.
They Provide Customized Service
Be sure to choose a reputable subprime lender who provides a valuable service. Subprime mortgages aren’t regulated by the federal government, it’s up to you to do your due diligence. This may include checking reviews, investigating their customer support, and looking into their credentials.
They Charge Fair Rates And Fees
You’ll also want to compare quotes from different lenders to see where the best deal is. Look at things such as interest rates, fees, and terms when comparing mortgage products and lenders.
Do Borrowers Have To Undergo The Mortgage Stress Test For A Subprime Mortgage?
B lenders who offer subprime mortgages can choose not to perform the stress test. Only federally regulated lenders must ensure borrowers pass the stress test before approving mortgage applications. B lenders are not federally regulated.
If you’re applying for a subprime mortgage from a B lender, you may not have to go through the mortgage stress test. This will make getting approved for a home loan much easier, especially if your credit score is less-than-perfect.
However, the mortgage stress test is meant to reduce your risk of defaulting on your mortgage. That’s because the lender will ensure you can qualify for a loan amount at a rate slightly higher than your contract rate in case rates increase soon. Even if you can bypass the stress test, you still want to avoid over-leveraging yourself with a home loan.
Final Thoughts
If your credit score and financial health are lagging, you may find some success getting approved for a subprime mortgage from a B lender. Just be sure to understand the risks that may come with subprime mortgages, including higher interest rates and less favourable terms. And always vet the lender before you sign on the dotted line.
Subprime Mortgage FAQs
Can I build my credit with a subprime mortgage?
What interest rate can you get with subprime mortgages?
What credit score do subprime borrowers typically have?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
