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How to Get a Mortgage with a Bad Credit Score in Canada

10 August 2022Tassie Milne 5 min read
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Do you have bad credit and want to take out a mortgage? The good news is that there are still options. Here are some ways to still get a mortgage with a bad credit score in Canada.

Generally speaking, anyone with a credit score below 600 is considered to have a bad credit score. A 600 credit score tends to be the border between qualifying for prime and subprime mortgage lending. If your credit score is below 600, that’s when prime lenders are typically no longer an option and you’ll need to seek out subprime lending.

Your credit score can be lower for many different reasons. Below are some of the more common reasons for having a poor credit score.

Missed Payments

Missed credit payments drag down your credit score. This should come as no surprise. Lenders want to see that you’re able to make your credit payments on time and in full. Missing payments will send your credit score in the wrong direction – down.

Being late on payments is damaging to your credit score as well. A late payment here and there that’s an honest mistake won’t have much of an affect on your credit score. However, if you have several missed payments, that’s when it can become an issue. Again, prime lenders only want to extend credit to those who can make their payments on time.

Credit Utilization

Credit utilization is how much of your available credit that you’re currently using. It looks at revolving credit, such as credit cards and lines of credit. The more of your available credit that you’re using, the more it affects your credit score. It’s best to aim to use less than 30% of your available credit at any time to avoid hurting your credit score.

Get a Co-Signer

The simplest way to qualify for a mortgage with a bad credit score is to get a co-signer. A co-signer is someone who is equally responsible for the mortgage if you fail to pay it back according to the terms and conditions you agreed to with the lender.

A co-signer is usually directly related to you. It could be your parents or siblings, but it doesn’t have to be. It could also be an aunt, uncle or even a friend.

Depending on your credit score, a prime lender may or may not be okay with a co-signer. If you’ve filed for bankruptcy or a consumer proposal, it really depends on the lender. The lender may not want you to come onto the title and mortgage of the property at first. The co-signer might be the only one on the title and mortgage to start. You might have to wait a while longer to be added.

The toughest part is finding a co-signer. Before someone co-signs, it’s important that they understand what it means. Essentially, it means that they are fully responsible for the debt if you fail to repay it. It will equally hurt their credit score if you don’t make the full payments as agreed on. As such, you should make sure you understand this before agreeing to have someone co-sign for you.

It may also affect the co-signer’s ability to qualify for future mortgage financing. This should be something that the co-signer is aware of as well.

Go with Subprime Lending

If you have a low credit score and a co-signer isn’t an option, you could look at taking out a bad credit mortgage. A bad credit mortgage is exactly as it sounds. It’s a mortgage for someone with bad credit.

When applying for a bad credit mortgage, you don’t ask the lender for a “bad credit mortgage.” You should be truthful about your credit score and see what products the lender has that you qualify for.

Something to be aware of when you apply for a bad credit mortgage is that the mortgage rates are almost always higher than a traditional mortgage. You could be expected to pay 1% or more higher than a traditional mortgage rate.

On top of that, there are almost always lender fees. You may have to pay a 1-2% lender fee. This is to compensate the lender for the higher level of risk it’s taking for approving you for this type of mortgage.

You can also be expected to make a much heftier down payment. When you have a good credit score, you can put as little as 5% down on the purchase of a primary residence. Not so when you have a lot of blemishes with your credit history.

This is a key point. Subprime lenders do not offer insured mortgages. This means that you need to put at least 20% down on the property. And depending on your credit score and the location of the property you’re buying, you might need to put 25% or even 35% down.

The simplest way to improve your credit score is to determine why your credit score is low and to take specific actions to improve it. The easiest way to do that is to request a copy of your credit report and review it to see where the shortcomings lie.

As mentioned earlier, missed payments are a common reason for a low credit score. By making your payments consistently on time over time, you can improve your payment history and therefore, improve your credit score.

High credit utilization is another reason for a low credit score. By paying down your balances on revolving accounts to get them to a more manageable level, your credit score may improve dramatically.

It’s important to note that while you can hurt your credit score in an instant, the steps to improve it take time. It can take a few months or longer to improve your credit score. If you don’t have that time and need to buy a home right now, that’s when you may consider going with a subprime lender.

The subprime lender can get you the financing you need now. It can be a temporary solution. You get to own the home today and can move to a prime lender once your credit improves.

The two main types of subprime lending are alternative lenders and private lenders.

An alternative lender is typically a financial institution, such as a bank or non-bank lender. The alternative lender sometimes even offers prime lending as well.

An alternative lender makes the most sense for a borrower who has bad credit, but not terrible credit. For example, someone who hasn’t filed for double bankruptcy. If that’s the case, that’s when you want to look at a private lender.

A private lender is often an individual investor. Unlike bank and non-bank lenders, a private lender doesn’t care as much about your bad credit score. Instead, it cares more about the property that you’re buying. It wants to get an appraisal and see how much it’s worth.

Private lenders usually want you to put more down, as the lower the down payment, the higher the risk to the private lender. The private lender wants to make sure it still gets paid in full if you fail to repay according to the terms of the private mortgage.

Tassie Milne Image

Written by Tassie Milne

General Manager - ClearScore Canada

Tassie heads up ClearScore Canada. She lives in Toronto with her husband and two young boys. In her free time, she can be found at the family lake house or playing ball hockey.