Securing a mortgage is often one of the most important financial milestones for Canadians, but for individuals with bad credit, it can feel like an impossible challenge. Whether you’ve faced financial setbacks in the past or have struggled with credit issues, securing a mortgage is not out of reach. Understanding your options, preparing your finances, and knowing how to approach the situation can increase your chances of success.
In this blog, we’ll guide you through the process of securing a mortgage with bad credit in Canada, outlining the strategies and options that could help you achieve homeownership, even with a less-than-perfect credit history.
Bad Credit in Canada
Before diving into how to secure a mortgage with bad credit, it’s important to understand what qualifies as bad credit in Canada and how it impacts your ability to borrow money.
In Canada, credit scores typically range from 300 to 900, with scores above 660 considered good or excellent. A score below 600 is generally regarded as “bad credit.” However, a bad credit score does not necessarily mean you cannot get a mortgage; it simply means that you may face higher interest rates or stricter terms.
Your credit score is determined by several factors, including:
- Payment history: Late or missed payments on loans, credit cards, or other debt
- Credit utilization: How much of your available credit you’re using
- Length of credit history: How long you’ve been using credit
- Types of credit: The variety of credit accounts you have (e.g., credit cards, loans)
- Recent credit inquiries: How often you’ve applied for new credit
Why Bad Credit Affects Your Mortgage Application
Lenders use your credit score to assess your risk as a borrower. A low score indicates a higher risk of default, which may lead to higher interest rates or, in some cases, a loan denial. Bad credit is often a result of missed payments, defaults, or high levels of debt, which signal to lenders that you may not be able to manage your mortgage payments reliably.
Despite these challenges, many Canadians with bad credit can still access mortgage financing through alternative methods.
Steps to Take Before Applying for a Mortgage with Bad Credit
To improve your chances of securing a mortgage, it’s essential to prepare your finances and understand your options. Here are some steps you can take before applying for a bad credit mortgage:
1. Check Your Credit Score and Credit Report
The first step is to assess the severity of your credit situation. Obtain your credit score and review your credit report from Canada’s two major credit bureaus: Equifax and TransUnion. This will give you a clear understanding of where you stand, and you’ll be able to identify any errors or areas for improvement.
If you spot any inaccuracies, dispute them with the credit bureau. This could lead to an immediate increase in your score.
2. Save for a Larger Down Payment
A larger down payment shows lenders that you are financially responsible and lowers the loan-to-value (LTV) ratio. The LTV ratio is the percentage of the home’s value you are borrowing. The lower the LTV, the less risk the lender faces. Typically, you may need at least 5% for a down payment, but if you have bad credit, a larger down payment (e.g., 10-20%) will improve your chances of approval.
3. Reduce Your Debt
Lenders will consider your debt-to-income (DTI) ratio when evaluating your mortgage application. This ratio compares your monthly debt payments to your monthly income. If you have high levels of debt, it could negatively impact your ability to get approved for a mortgage.
Try to reduce existing debts, especially high-interest ones like credit card debt. Pay down loans or consolidate debt where possible to improve your DTI ratio.
4. Gather Documentation
Lenders will want to see proof of income, employment, and assets, as well as your credit history. Prepare the following documents:
- Proof of income (pay stubs, tax returns, or bank statements)
- Proof of employment (letter from your employer or job contract)
- Documentation of any assets (savings, RRSPs, or other investments)
- Identification (driver’s license, passport)
Being thorough in gathering your documentation can help speed up the approval process and show lenders that you are organized and committed.
Mortgage Options for Canadians with Bad Credit
There are several mortgage options for individuals with bad credit in Canada. Below, we break down some of the most common choices:
1. Alternative Lenders
In addition to traditional banks, Canada has a range of alternative lenders who specialize in providing mortgages to individuals with bad credit. These lenders may have more lenient credit requirements and might focus on other aspects of your financial health, such as your income or down payment.
While alternative lenders can be more flexible, they also tend to charge higher interest rates than traditional lenders. Some well-known alternative lenders in Canada include credit unions, mortgage brokers, and private lenders.
2. Government-Sponsored Programs
In certain cases, the Canadian government offers programs designed to help individuals with bad credit secure a mortgage. One such program is the Canada Mortgage and Housing Corporation (CMHC), which provides mortgage loan insurance to buyers who might not qualify for traditional mortgages. This program is primarily aimed at first-time homebuyers but can be a valuable option if you are struggling with a low credit score.
3. Co-Signers
If your credit score is low, another option is to have a co-signer with a stronger financial profile. A co-signer is someone who agrees to take responsibility for the mortgage if you are unable to make payments. This can significantly improve your chances of securing a mortgage because the lender will see the added security of a co-signer with a higher credit score.
Key Considerations When Securing a Mortgage with Bad Credit
1. Interest Rates
Bad credit typically means higher interest rates. Over the course of a 25- or 30-year mortgage, even a small increase in interest rates can result in significant additional costs. It’s important to consider your ability to handle these higher monthly payments and ensure that they fit within your budget.
2. Shop Around for the Best Deal
Not all lenders offer the same terms. It’s essential to shop around and compare different lenders, including banks, credit unions, and alternative lenders. A mortgage broker can also help you find the best deal for your situation.
3. Mortgage Insurance
If you’re putting down less than 20% of the home’s purchase price, mortgage insurance will be required. This is an additional cost to consider when calculating your monthly payments. With bad credit, some lenders may require additional mortgage insurance to offset the risk.
Securing a mortgage with bad credit in Canada is possible, but it requires preparation, research, and a clear understanding of your options. By checking your credit, saving for a larger down payment, reducing your debts, and working with alternative lenders, you can improve your chances of getting approved. Remember that while bad credit may come with higher interest rates and less favorable terms, there are still opportunities available for those determined to own a home.
Contact Mortgage Squad to Secure a Bad Credit Mortgage
Struggling with a low credit score but dreaming of homeownership? We specialize in helping individuals with less-than-perfect credit secure mortgages by connecting them with alternative lenders who understand unique financial situations. With extensive knowledge of the Canadian market, our experienced mortgage brokers are dedicated to finding competitive rates and flexible terms that meet your needs.
Our personalized approach not only helps you achieve your dream of owning a home, but also supports you in improving your credit score over time through responsible mortgage management. From thorough pre-qualification to strong application support, we’re here to guide you every step of the way.