How to Get a Mortgage With Bad Credit in Canada

Obtaining a mortgage in Canada with a less-than-perfect credit history presents unique challenges. While securing financing may require navigating different avenues, it is often possible to achieve this goal. This guide aims to demystify the process, offering insights and actionable steps for Canadians looking to secure a mortgage despite past credit difficulties.

Defining Bad Credit for Mortgages

Understanding what “bad credit” signifies within Canadian mortgage lending is a first step. Credit scores in Canada typically range from 300 to 900, with higher scores indicating lower risk to lenders. A score below approximately 660 is often considered “fair” or “poor” by many lenders, with scores under 560 generally falling into the “poor” category.

Lenders assess credit scores to gauge an applicant’s financial reliability and likelihood of repaying a loan. A lower score signals increased risk, often due to factors such as missed or late payments on credit accounts. High credit utilization, where a significant portion of available credit is used, can also negatively impact a score. Severe financial events like bankruptcies or consumer proposals remain on a credit report for several years, significantly affecting mortgage eligibility.

Exploring Mortgage Options

Individuals facing challenges with traditional mortgage approvals due to credit history often find solutions through alternative lending avenues in Canada. These options cater to borrowers who may not meet the strict criteria of major financial institutions. Each alternative comes with distinct characteristics regarding interest rates, down payment requirements, and qualification criteria.

B lenders, also known as alternative lenders, form a significant part of this market. These institutions, which include credit unions and trust companies, operate under different lending guidelines than large banks. They are more flexible regarding credit scores and income verification, but typically charge higher interest rates, often 1% to 3% above prime rates, to offset the increased risk. A larger down payment, commonly 20% or more, is usually required by B lenders, as this reduces their exposure to risk.

Private lenders represent another option, often considered when B lenders are not feasible. These can be individuals or mortgage investment corporations (MICs) that primarily focus on the property’s equity rather than the borrower’s credit or income. Private mortgages are generally short-term solutions, typically 1 to 3 years, and come with higher interest rates, ranging from 6% to 15% or more, along with substantial fees, such as 1% to 3% lender fees.

Bringing in a co-signer or guarantor can also improve mortgage eligibility. A co-signer, who shares ownership, or a guarantor, who does not, leverages their strong credit and income to support the mortgage application. They become legally responsible for the mortgage debt if the primary borrower defaults, providing an added layer of security for the lender. This arrangement can lead to more favorable terms.

A vendor take-back mortgage is another option. In this scenario, the seller of the property acts as the lender, providing financing directly to the buyer. The terms are negotiated directly between the buyer and seller. This arrangement can be useful for properties difficult to finance through traditional channels.

Strengthening Your Financial Position

Preparing your finances before applying for a mortgage can significantly improve your chances of approval. This involves focusing on credit improvement, enhancing your down payment, and reducing existing debt. Preparation demonstrates financial responsibility to potential lenders.

Strategies to improve your credit score can impact mortgage eligibility and terms. Paying all bills on time is important, as payment history is a major factor in credit scoring. Reducing credit card balances to keep utilization below 30% of available credit limits is advisable. Regularly obtaining your credit reports from Equifax and TransUnion allows you to check for errors and dispute inaccuracies.

Increasing your down payment can mitigate the risk perceived by lenders. A larger down payment, often 20% or more, can help secure more favorable terms and potentially avoid mortgage default insurance premiums. Strategies for accumulating a larger down payment include disciplined savings plans or utilizing Canada’s Home Buyers’ Plan (HBP), which allows eligible first-time homebuyers to withdraw up to $60,000 from their Registered Retirement Savings Plans (RRSPs) tax-free. This withdrawn amount must typically be repaid to the RRSP over a 15-year period.

Reducing existing debt strengthens your financial standing. Lenders assess debt-to-income ratios, such as Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, to determine affordability. Lowering these ratios by paying down credit card balances, car loans, or personal loans can increase your borrowing capacity.

Compiling necessary financial documentation in advance streamlines the application process. Lenders require proof of income, such as recent pay stubs, employment letters, T4 slips, and Notices of Assessment (NOA) from the Canada Revenue Agency (CRA). Bank statements from the past few months are requested to verify savings and spending habits. Statements for all existing debts and proof of the source of your down payment funds will also be required.

Navigating the Mortgage Application

Once your financial position is strengthened and documentation prepared, the next phase involves pursuing a mortgage. This stage focuses on the application mechanics and subsequent steps.

Engaging a mortgage broker with experience in complex financial situations can be beneficial. Brokers possess knowledge of the Canadian lending landscape, including access to B lenders and private lenders who specialize in supporting borrowers with credit challenges. They can analyze your financial profile, identify suitable lending options, and guide you through mortgage products.

The broker will assist in compiling and submitting your documents and application to potential lenders. This initiates the underwriting process, where the lender reviews your income, assets, and credit profile. During underwriting, the lender assesses the property’s value to ensure it aligns with the loan amount, often requiring an appraisal.

Following this review, a conditional approval may be issued, indicating the lender’s willingness to provide financing subject to conditions. These conditions often include providing additional documentation, satisfying specific financial requirements, or obtaining a property appraisal. Promptly fulfilling these conditions is important to advance the mortgage process.

The final steps involve closing the mortgage. This typically includes legal professionals reviewing mortgage documents, ensuring the transfer of funds, and registering the mortgage against the property title. Borrowers should anticipate closing costs, such as legal fees, appraisal fees, and potential property transfer taxes, depending on the province.