Can I Get a Mortgage with Bad Credit?

Is It Possible to Get a Mortgage with Bad Credit in Canada?

You had a few financial setbacks when life’s speed bumps tripped you up, but now you’re on the right path and are ready to take the leap into home ownership. The only problem is: you’re not sure if your pesky credit history is going to prevent a lender from giving you a mortgage loan. The good news is there are some options available to you; the bad news is they don’t always come cheap. Here’s a quick breakdown of how you can check your credit score and, if you need to, get a bad credit mortgage. While many brick-and-mortar banks consider customers with poor credit to be high risk, there are lenders who are willing to extend loans to clients, regardless of their payment history. One option is to contact online bad credit mortgage lenders or finance services in your area. They generally look at factors such as income range, type of employment, and whether the applicant is a first time buyer.

1. Check Your Credit Score

In Canada, your credit score is a number between 300 and 900 that is assigned to you by a credit bureau (Canada’s two major credit bureaus are Equifax and TransUnion) and is used to tell lenders how you have dealt with available credit in the past. To check your credit score, you can either pay Equifax or TransUnion for a report plus your score, or you can sit down with a mortgage broker and get them to check it for free. If you’ve paid all of your bills on time, had no major bankruptcies and generally don’t have more debt than you can reasonably afford to pay back, you should have a credit score above 680 – anything less and you’ll want to keep reading.

2. Find a Bad Credit Mortgage Lender

If you have a credit score in the 600-700 range or above, you should be able to get a mortgage loan from one of the big banks, commonly referred to as “A lenders”. If, on the other hand, you have a credit score below 600, most of Canada’s big banks will not approve you for a mortgage loan. Instead, you’ll have to look for a “B lender” or “subprime lender”; these financial institutions, including trust companies, work almost exclusively with people that do not have ideal credit scores. And if you’ve gone through a bankruptcy or consumer proposal recently (within the last two years), you may even need to work with a private mortgage lender. If you’re working with a mortgage broker, they should be able to put you in touch with a lender they know will work with you.

3. Save a Larger Down Payment

Lenders look at a number of things, when considering your mortgage application, including your credit score, income and debt levels. If you have good credit, you can get a mortgage loan from most lenders with only a 5% down payment, because you’re seen as a low risk. If you have bad credit, the lender is taking on a higher risk by loaning you money, so most will want a much larger down payment – often 20-25%. The bonus is that a larger down payment may give you a little more leverage when it comes to negotiating a mortgage rate, because you are less risky than someone who has very little equity in their home.

4. Be Prepared to Pay Extra Fees

On top of having to save a larger down payment, you’ll also need to have some more cash set aside for extra fees. First, lenders can charge up to 1% of the mortgage loan value for processing a bad credit application. As well, because banks typically don’t compensate brokers for bringing them clients with credit issues, your broker may also charge you an additional 1%. Two per cent on a $391,820 home – the national average according to the Canadian Real Estate Association – is $7,836. Add that to a 20% down payment ($391,820 x 0.20 = $78,364) and you’d need to have $86,200 cash available before you could make the purchase.

5. Say goodbye to the Best Mortgage Rates

As you saw in the chart above, your credit score has a direct impact on the lender you can work with, as well as the mortgage rate you can get. If you have good credit, you can work with the big banks and access the best mortgage rates. If you have less than stellar credit, you’ll have to work a “B lender” or private lender and, in turn, be subject to higher interest rates. Remember, your lender looks at your credit score and report to determine how risky it would be to lend money to you. If you want to be able to access a lower mortgage rate at your time of renewal, make all of your monthly mortgage payments on time and do other things to boost your credit score, including using a credit card responsibly and/or paying off any other debts you may have.

Be Realistic – Buy What You Can Afford

Since the down payment is a certain percentage of the property’s value, you may want to set a price range based on the maximum down payment you can afford. Your debt to income ratio (DTI) is also an important consideration, and a high DTI shows that you may be unable to meet your monthly payments. Look at your housing expenses as well and factor in costs such as cooperative, condominium, or homeowners association fees, hazard insurance, property taxes, interest charges, and principal amount. Lenders also look at your total debt ratio. They factor in recurring payments such as alimony and child support, student and consumer installment loans, vehicle leases and loans, and credit cards.

Mortgage Brokers in Canada

Mortgage brokers can be helpful in many ways as they help potential home buyers to find competitive interest rates and terms. Brokers maintain contacts with different financial establishments and save customers valuable time and money. Some lenders work exclusively with brokers, and they have access to a large pool of borrowing solutions. There is a difference between financial establishments and mortgage brokers in that the later work as intermediaries between lenders and home buyers. It is their job to determine which financial institution is the best choice based on the customer’s credit profile and loan purpose and requirements.

Online Bad Credit Mortgage Lenders in Canada

Canadian Mortgage Finder – http://www.canadianmortgagefinder.com/
This is a good place to look for a bad credit mortgage if you can put at least 15 percent down. The terms offered depend on whether you are a repeat or new home buyer. There are different options available, including open, variable, fixed rate, and special mortgages. Rates vary based on the loan term and range from 2.89 percent on a 1-year mortgage to 4.49 percent on a 10-year loan. The rate on variable mortgages is set at 2.45 percent.

Family Lending – https://www.familylending.ca/lending/poor-credit.html
This is a lending service that specializes in bad credit mortgages and offers rates ranging from 2.3 percent for a variable rate mortgage to 4.39 percent for a 10-year closed loan. Fixed rate mortgages usually go with higher rates but give customers a sense of security. The interest rate is based on the loan type while amounts vary from less than $50,000 to $500,000 and higher. There is an option to get preapproved. Borrowers with poor credit are asked to provide proof of professional appraisal as well as proof of income.

Canada Lend – http://www.canadalend.com/Services/BadCredit.aspx
This is yet another loan provider that offers mortgages to borrowers with average and bad credit. Customers are offered fixed rate loans and terms range from 1 to 5 years. The rate on a 2-year mortgage can be as low as 2.49 percent while 3-year mortgages feature a slightly higher rate of 2.59 percent. Borrowers with different credit profiles qualify, even applicants who have consumer proposals, bankruptcies, and tarnished credit. Clients who are in a consumer proposal and those who are new to credit are also likely applicants. To apply for a loan, clients provide details such as their SIN, current mortgage balance, residential value and status, reason for loan and amount required, outstanding debts, type of employment, and income.

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