Buying a home is a major milestone, but for many Canadians, securing a mortgage can be a challenge, especially if they have bad credit. With financial difficulties, missed payments, or other credit issues, many wonder whether homeownership is even possible. However, even if your credit score isn’t ideal, there are still ways to qualify for a home loan in Canada.
In this blog, we’ll walk you through practical steps you can take to improve your chances of securing a mortgage, and provide tips on how to navigate the process when you have less-than-perfect credit.
What is a Bad Credit Score?
In Canada, your credit score is typically measured using a scale from 300 to 900, with scores below 600 often considered to be bad credit. A low credit score indicates to lenders that you might be a risky borrower, potentially leading to higher interest rates, smaller loan amounts, or even outright denial of a mortgage application. Factors that contribute to bad credit include late payments, high credit utilization, bankruptcies, and other financial challenges.
While bad credit doesn’t automatically disqualify you from getting a home loan, it can make the process more complicated. Lenders may see you as a higher risk, which means you will need to take extra steps to prove that you’re still a reliable borrower.
How Does Bad Credit Affect Mortgage Approval?
Lenders assess a borrower’s ability to repay a loan by looking at several factors, including your credit score. For individuals with bad credit, the consequences are typically:
- Higher Interest Rates: Lenders may offer mortgages at higher interest rates to offset the increased risk.
- Smaller Loan Amounts: With bad credit, lenders may be hesitant to offer you a large mortgage.
- Stricter Terms: You may face tighter loan conditions or shorter repayment periods.
- Down Payment Requirements: A larger down payment could be required to offset the risk associated with your credit.
However, while these challenges can make homeownership more difficult, there are still options available.
Steps to Qualify for a Home Loan with Bad Credit
1. Understand Your Credit Score and Report
Before applying for a mortgage, it’s important to check your credit score and review your credit report. This gives you a clear idea of where you stand and what lenders will see when they evaluate your application. You can request a free credit report from Canada’s two main credit bureaus: Equifax and TransUnion.
Review your report for any discrepancies or errors. If you spot any mistakes, dispute them right away, as these could negatively impact your score. Additionally, try to identify areas where you can improve, such as reducing outstanding debt or making timely payments.
2. Save for a Larger Down Payment
One of the best ways to improve your chances of getting approved for a home loan with bad credit is by saving for a larger down payment. While the minimum down payment in Canada is 5% for homes under $500,000, a larger down payment (typically 20% or more) can help reduce the lender’s risk. A larger down payment:
- Lowers your loan-to-value (LTV) ratio, making you appear less risky to lenders.
- May eliminate the need for mortgage default insurance (if your down payment is 20% or more), which can save you money in the long run.
- Gives lenders more confidence that you are financially responsible and serious about homeownership.
3. Work with a Mortgage Broker
Mortgage brokers are experts in the home loan process, and they can be particularly helpful for individuals with bad credit. They have access to a range of lenders, including those who specialize in high-risk or bad credit mortgage. Brokers can assess your financial situation and guide you towards lenders who are more likely to approve you for a loan.
A mortgage broker can also help you compare rates and terms from different lenders, helping you find the most favorable loan options. Working with a broker can save you time and effort while improving your chances of finding a loan that fits your needs.
4. Consider Alternative Lenders
Traditional banks and credit unions are often the go-to option for home loans, but they may not be the best choice for individuals with bad credit. Instead, you may want to consider alternative lenders, such as:
- Private Lenders: These lenders often specialize in higher-risk loans and may be more willing to approve your application despite a low credit score.
- B Lenders: These are smaller institutions that may offer more flexible terms than big banks. They can be a good option for people with bad credit, though their interest rates are often higher than those of traditional lenders.
Keep in mind that alternative lenders may charge higher interest rates, so it’s essential to carefully review the terms of any loan offer.
5. Provide Proof of Stable Income and Employment
One of the most important factors lenders consider when approving a mortgage is your ability to repay the loan. If you have bad credit, it’s crucial to demonstrate that you have a stable income and employment history. Lenders will want to see that you have a steady job, reliable income, and the capacity to handle monthly mortgage payments.
If you are self-employed or have irregular income, you may need to provide additional documentation, such as tax returns, bank statements, or profit-and-loss statements, to prove your financial stability.
6. Consider a Co-Signer
If your credit score is too low to qualify for a mortgage on your own, you may want to consider asking a family member or friend with better credit to co-sign the loan. A co-signer is someone who agrees to take on the responsibility of the loan if you are unable to make the payments.
While this can improve your chances of getting approved, keep in mind that it also places financial responsibility on the co-signer. If you miss payments, it could negatively affect their credit score as well. This is a big commitment, so make sure you and the co-signer understand the risks involved.
7. Shop Around for the Best Mortgage Rates
If you have bad credit, it’s essential to shop around for the best mortgage rates. Even a small difference in interest rates can significantly impact the total cost of your mortgage over time. Different lenders may offer different terms, so it’s crucial to compare multiple options to find the one that suits your needs and budget.
8. Avoid New Credit Applications
Finally, avoid applying for new credit cards or loans in the months leading up to your mortgage application. Each credit inquiry can lower your score, making it harder to secure a mortgage. Instead, focus on improving your credit score and financial situation before applying for a loan.
Qualifying for a home loan with bad credit in Canada can be challenging, but it’s not impossible. By understanding your credit score, saving for a larger down payment, working with a mortgage broker, and exploring alternative lenders, you can increase your chances of approval. Remember that lenders want to see that you have the ability to repay the loan, so demonstrating financial stability and responsible behavior will go a long way.
With careful planning and perseverance, you can overcome bad credit and achieve your dream of homeownership.
Secure Bad Credit Mortgage with Complete Support from Mortgage Squad Advisors
If you have bad credit but still want to buy a home, don’t lose hope. The Mortgage Squad Advisors are here to help you secure a bad credit mortgage and guide you through the process.
Our team of experienced mortgage brokers understands that having bad credit can make it challenging to get approved for a traditional mortgage. That’s why we offer comprehensive support to help you navigate this complex journey.
From understanding your credit score and improving it to finding alternative lenders and negotiating with them on your behalf, our advisors will be there every step of the way. We’ll work with you to create a personalized plan that suits your financial situation and goals.