Just like loans or credit cards, it’s harder to get approved for a mortgage when you have a lower credit score – but it is possible. When you apply for a mortgage, lenders weigh a few different factors, including your down payment amount, employment history and household income, debt levels, credit score and credit history (including late payments, bankruptcies, liens or accounts sent to collections).
Credit scores in Canada range from 300 to 900. The higher your score, the more likely you are to be approved for a mortgage and be offered the best interest rates. Having “bad credit” usually means having a credit score below 600, due to things like not having an established credit history (for example, if you’re a newcomer to Canada), paying bills late (or not paying them at all), carrying a lot of debt, or applying for new credit too often.
Luckily, you still have options for applying for a mortgage with bad credit, and there are a few things you can do in the meantime to increase your chances of getting approved – including ways to improve your credit score.
What are the options for getting a mortgage with bad credit?
Generally, anything above 700 is considered to be a decent credit score and shows lenders that you’re reliable and responsible with borrowing money and paying it back. Most banks and credit unions require a credit score of at least 620 to 680 or higher to qualify for a mortgage. For insured mortgages – where the down payment is less than 20% of the purchase price and buying mortgage insurance is required – the Canada Housing and Mortgage Corporation (CMHC) requires at least one applicant to have a minimum credit score of 600.
If your credit score is too low to qualify for a mortgage from a traditional bank or credit union, there are a few other options available to you.
Subprime mortgages: This type of mortgage is for people who are considered “subprime” borrowers (as opposed to prime borrowers) and don’t meet the lending requirements for regular mortgages because of issues like having a low credit score, low or inconsistent income (such as rental income of self-employment), high debt levels or past bankruptcy or other issues on their credit history. Subprime mortgages usually have shorter terms, less than two years long, and higher interest rates. A subprime mortgage isn’t a long-term solution to having poor credit, but can be used to secure a mortgage now while you work to improve your financial situation so you can qualify for a traditional mortgage in the future. Subprime mortgages are usually offered by alternative lenders (see below).
Alternative mortgage lenders: If you don’t qualify for a mortgage with one of Canada’s Big Six banks or credit unions, there are also alternative lenders such as smaller banks and credit unions, private mortgage companies and B-lenders. Alternative lenders aren’t regulated in the same way as the big banks, and have looser eligibility requirements on credit scores, down payments, income and debt-to-income ratios. Alternative lenders tend to offer shorter mortgage terms, and may let you get a mortgage with a lower down payment amount. You can seek out an alternative lender to apply for a new mortgage, or to renew or refinance an existing mortgage if your financial situation has changed and you won’t qualify for a renewal with a big bank or credit union.
What factors should you consider when applying for a mortgage with bad credit?
One of the biggest things to consider about applying for a mortgage is that having a low credit score makes you a riskier borrower in the eyes of lenders. A mortgage is the biggest debt many people will take on in their lifetimes, and banks want to make sure you can be relied on to make your mortgage payments on time, in full, for years to come.
Having a low credit score means your mortgage application is more likely to be denied by a traditional bank or credit union, or that you may only qualify for certain types of mortgages with higher interest rates and less favourable terms to compensate for the increased risk. Basically, if you’re deemed a higher risk, you’re going to pay for it.
How can you improve your chances of getting a mortgage with bad credit?
All hope isn’t lost if you have a bad credit score – there are a few ways you can improve your financial picture and increase your chances of getting approved for a mortgage.
Repair your credit: The good news about having a bad credit score is that it doesn’t last forever. Once you identify the reasons why your credit score is low, you can start taking steps to revive it. The biggest factors that affect your credit score are paying your bills on time, reducing your debts and using credit responsibly, the age of your accounts (older = better), having a mix of different types of credit (such as credit cards, installment loans and mortgages) and not applying for too many new credit accounts. However, the results aren’t instant – it does take at least a few months for your good behaviour to be reflected on your credit score. Serious financial infractions like foreclosures, bankruptcies, or accounts sent to collections can affect your credit score for several years.
Larger down payment: Some lenders may be more forgiving of a lower credit score if you have a larger chunk of money to put towards your down payment, at least 20% of the home’s purchase price or more. Even if you don’t have a low credit score, larger down payments are looked upon favourably by lenders because it shows you’re financially secure enough to save up a large amount of cash, and it means less risk for the bank because they’re not lending you as much money. For the borrower, a higher down payment also means more home equity, a lower overall mortgage balance and lower mortgage payments.
Get a co-signer: A co-signer is someone who signs on to your mortgage and guarantees to be responsible for continuing to pay your mortgage if you stop doing so. If you don’t qualify for a mortgage based on your financial profile, having a co-signer with a good income and credit score can help boost your chances of getting approved and getting a better interest rate. For most people, a co-signer will usually be a parent another close relative. Asking someone to co-sign your mortgage isn’t a decision to be taken lightly – the co-signer takes on all the risks and responsibilities of making mortgage payments on your home if you can’t do it, and any missed payments or defaulting on your mortgage will also affect their credit score.
How can mortgage professionals and specialists assist you with bad credit?
Mortgage brokers: Mortgage brokers act as the middlemen between homebuyers and financial institutions, and can negotiate and access mortgage rates from a variety of lenders to help buyers find the best deal. Mortgage brokers also guide buyers through the mortgage application process and can answer all of your questions. Some mortgage brokers work specifically with people who have bad credit or don’t otherwise qualify for traditional mortgages, and can show you different borrowing options that may work for your financial situation.
Credit counsellors: If late payments and mounting debts are affecting your credit score, a credit counsellor can provide advice and create a debt management plan where they negotiate with creditors to consolidate all of your debts into a single monthly payment (sometimes interest-free or at a lower rate). Just make sure to do your research on an organization or individual’s qualifications, reputation, the services they provide and if there’s any cost. You can find more information on how credit counsellors work and how to find one through Credit Counselling Canada.
Financial advisors: If you’re looking for a more holistic look at your financial health and future, a financial advisor or fee-only certified financial planner can help create a financial plan to meet both short and long-term goals. Their services may include creating a budget (including paying off debt), investment planning, tax planning, insurance, and helping you save for things like your child’s future education, buying a home or retirement. Again, always check their reputation, qualifications and how they get paid for their services, or ask for recommendations from friends and family.
Getting approved for a mortgage can be a daunting process, especially if your credit score needs some work. However, there alternative options available if you want to secure a new mortgage or mortgage renewal now, or if you’re looking to improve your credit score so you can qualify for a mortgage in the future.
Jane Switzer is a writer and editor with more than a decade of experience producing content for major Canadian newspapers, magazines, fintech companies and banks. Jane got her start working in journalism as a reporter and copy editor before transitioning to content writing, editing and SEO.