Can I Get a Mortgage With Bad Credit in Canada?

A mortgage in Canada might seem out of reach if you have a less-than-perfect credit history, but it is often possible to achieve homeownership. While traditional lenders have stringent requirements, various pathways and strategies exist for individuals facing credit challenges. Understanding how credit impacts mortgage eligibility and exploring alternative options can open doors that might initially appear closed.

Understanding Credit and Mortgage Eligibility in Canada

In Canada, credit scores, such as FICO Scores and Beacon Scores, range from 300 to 900. A score below 560 is considered “bad credit,” while scores between 560 and 659 are “fair.” Most traditional lenders, or A-lenders, prefer applicants to have a credit score of at least 660, with some requiring 680 or higher for conventional mortgages. Scores above 700 are optimal, with 740+ preferred for the best rates and terms.

Lenders assess creditworthiness by evaluating several factors beyond the credit score. They examine your credit history, looking for consistent payment behavior and a responsible track record with debt. Your debt-to-income (DTI) ratio is also a significant consideration, measuring the percentage of your monthly gross income that goes towards debt payments. In Canada, lenders use two ratios: the Gross Debt Service (GDS) ratio, which should not exceed 39% of your gross income for housing costs, and the Total Debt Service (TDS) ratio, which should not surpass 44% for all debt obligations including housing. High credit utilization, the amount of credit used compared to available credit, can also negatively impact your score and eligibility, with lenders preferring utilization below 35%.

Pathways to a Mortgage with Credit Challenges

For those with credit challenges, traditional banks have strict lending criteria, making approval unlikely if your credit score is below 680 or if you have recent financial setbacks. However, alternative lenders, known as B-lenders, and private lenders offer viable solutions. These lenders have more flexible underwriting criteria and may consider credit scores as low as 500, focusing more on the overall financial picture rather than solely on the credit score. B-lenders include mortgage finance companies and some credit unions.

Individuals seeking a mortgage with credit challenges may also consider a co-signer or guarantor. A co-signer signs the mortgage loan and shares equal responsibility for repayment, legally obligating them to make payments if the primary borrower defaults. They are listed on the property title, and their strong credit history and stable income can significantly strengthen a mortgage application. While a co-signer takes on shared ownership and responsibility, a guarantor is only responsible if the primary borrower defaults and does not have ownership rights. Mortgage brokers specializing in non-traditional lending can be helpful, as they work with a broad network of B-lenders and private lenders and can negotiate terms on your behalf.

Preparing for Your Mortgage Application

Preparation is crucial when seeking a mortgage with credit challenges. Lenders will require a significant down payment, higher than for those with good credit. While a 5% down payment is common for borrowers with excellent credit, those with poor credit may need at least 20% to 25% of the property value. A larger down payment reduces the lender’s risk and can increase your chances of approval.

Gathering documents is a fundamental step. Lenders require proof of identity, income verification, and details about your financial situation. This includes recent pay stubs, employment letters, T1 General tax forms, and Notices of Assessment (NOA) from the Canada Revenue Agency. Bank statements, investment statements, and existing debts, such as credit card balances, car loans, and student loans, are necessary to demonstrate your financial health. If a portion of your down payment is a gift, a signed letter from the giftor confirming it is non-repayable is required.

Improving your credit score before applying can lead to better mortgage terms. Reviewing your credit report for errors, consistently making timely payments on all existing debts, and paying down high-interest debts are effective strategies. Avoiding new credit applications during this period prevents further inquiries that might temporarily lower your score. Understanding your financial picture, including budgeting and assessing affordability, helps determine a realistic mortgage amount and prepare for homeownership commitments.

Navigating the Mortgage Application

Once your preparation is complete, the next step involves navigating the application process. Working with a mortgage broker is beneficial, especially if you have credit challenges. A broker can assess your financial situation, identify suitable lenders from their network, and help package your application effectively to highlight your strengths. They can guide you through the process, from initial consultation to pre-approval and final submission.

When submitting your application, be prepared for thorough scrutiny. Lenders will verify all provided documentation, including income, employment, and financial assets. Applicants with less-than-perfect credit should anticipate higher interest rates and potentially additional fees compared to conventional mortgages. The approval process might involve more stringent qualifying criteria beyond your credit score, and the timeframe for approval can vary. Lenders may request further documentation or clarifications, and the process moves to conditional approval, followed by appraisals and legal processes leading to the final closing of the mortgage.