Mortgagerateslocal.com – Are you looking for a mortgage in Canada, but worried about your bad credit? Do you think that your low credit score will prevent you from getting approved for a mortgage or getting a good interest rate?
If so, you are not alone. Many Canadians struggle with bad credit due to various reasons, such as late payments, collections, bankruptcy, foreclosure, or repossession. Having bad credit can make it harder and more expensive to get a mortgage.
However, having bad credit does not mean you have to give up on your homeownership dreams. There are ways to get a mortgage with bad credit in Canada, as long as you are willing to work on improving your credit situation and finding the right lender for your needs.
In this article, we will explain what bad credit is, how it affects your mortgage eligibility and interest rate, and how you can qualify for a mortgage with bad credit in Canada. We will also share some tips and resources to help you improve your credit score and find the best mortgage deal for your situation.
What is bad credit?
Your credit score is a number that reflects your credit history and your ability to repay your debts on time. It ranges from 300 to 900, with higher scores indicating better credit. Your credit score is calculated by two major credit bureaus in Canada: Equifax and TransUnion.
They use different formulas and criteria to evaluate your credit information, such as your payment history, your credit utilization, your credit mix, your credit age, and your credit inquiries. Your credit score is one of the main factors that lenders use to determine your eligibility and interest rate for a mortgage.
Generally speaking, the higher your credit score, the more likely you are to get approved for a mortgage and the lower interest rate you will pay. The lower your credit score, the less likely you are to get approved for a mortgage and the higher interest rate you will pay.
There is no universal definition of what constitutes bad credit, as different lenders have different standards and thresholds for their mortgage products. However, as a rule of thumb, you will need a credit score of at least 680 to qualify for a mortgage with a traditional lender, such as a bank or a credit union.
Anything below 680 is considered too low and risky for a traditional lender, and you may have to look for alternative options, such as a private lender or a B lender. A private lender is an individual or a company that lends money to borrowers who do not qualify for a mortgage with a traditional lender.
A private lender may charge higher interest rates and fees, and may require a larger down payment and a shorter loan term. A private lender may also have more flexible and lenient criteria for approving a mortgage, and may not rely solely on your credit score.
A B lender is a type of alternative lender that operates between a traditional lender and a private lender. A B lender may be a trust company, a mortgage investment corporation, or a credit union that specializes in lending to borrowers with bad credit or other challenges.
A B lender may charge slightly higher interest rates and fees than a traditional lender, but lower than a private lender. A B lender may also have more flexible and lenient criteria for approving a mortgage, but may still require a minimum credit score and a minimum down payment.
How does bad credit affect your mortgage?
Having bad credit can affect your mortgage in several ways, such as:
Limiting your options
Having bad credit can limit your options for getting a mortgage, as you may not qualify for a mortgage with a traditional lender, or for certain types of mortgages, such as a high-ratio mortgage or a conventional mortgage. You may have to look for alternative options, such as a private lender or a B lender, or for different types of mortgages, such as a low-ratio mortgage or a non-conventional mortgage.
Increasing your costs
Having bad credit can increase your costs for getting a mortgage, as you may have to pay higher interest rates and fees, or save up for a larger down payment. You may also have to pay for mortgage default insurance, which is a type of insurance that protects the lender in case you default on your mortgage.
Mortgage default insurance is mandatory if your down payment is less than 20% of the purchase price of the property, and is usually added to your mortgage balance. The cost of mortgage default insurance depends on your loan-to-value ratio, which is the percentage of the purchase price that you borrow, and your credit score. The lower your credit score, the higher the cost of mortgage default insurance.
Reducing your mortgage affordability
Having bad credit can reduce your affordability for getting a mortgage, as you may have to borrow less money or buy a cheaper property. Your affordability for getting a mortgage depends on your income, your debt, your credit score, and your interest rate.
The lower your income, the higher your debt, the lower your credit score, and the higher your interest rate, the less money you can borrow and the less property you can afford.
How can you qualify for a mortgage with bad credit in Canada?
If you have bad credit and want to get a mortgage in Canada, there are some steps you can take to improve your chances of qualifying, such as:
1. Improving your credit score to get a mortgage with bad credit in Canada
One of the best ways to qualify for a mortgage with bad credit is to improve your credit score. You can improve your credit score by paying your bills on time and in full, paying down your debt and lowering your credit utilization, diversifying your credit mix, increasing your credit age, and limiting your credit inquiries.
You can also check your credit report for any errors or inaccuracies and dispute them with the credit bureaus. You can get a free copy of your credit report from Equifax and TransUnion once a year, or use a free online service, such as Borrowell or Credit Karma, to monitor your credit score and get tips on how to improve it.
2. Saving up for a larger down payment
Another way to qualify for a mortgage with bad credit is to save up for a larger down payment. A larger down payment can reduce your loan-to-value ratio, which can lower your interest rate and your mortgage default insurance cost.
A larger down payment can also show the lender that you are serious and committed to buying a home, and that you have some equity and savings to fall back on in case of an emergency. The minimum down payment required for a mortgage in Canada depends on the purchase price of the property.
For properties under $500,000, the minimum down payment is 5%. For properties between $500,000 and $999,999, the minimum down payment is 5% for the first $500,000 and 10% for the remaining amount. For properties over $1 million, the minimum down payment is 20%. However, if you have bad credit, you may need a larger down payment, such as 15% or 20%, to qualify for a mortgage with an alternative lender.
3. Shopping around for different lenders and mortgage products
A third way to qualify for a mortgage with bad credit is to shop around for different lenders and mortgage products. Different lenders have different criteria and thresholds for approving a mortgage, and different mortgage products have different features and benefits.
You may be able to find a lender that is willing to work with you despite your bad credit, or a mortgage product that suits your needs and goals. For example, you may be able to find a B lender that offers a low-ratio mortgage with a reasonable interest rate and a flexible repayment schedule, or a private lender that offers a non-conventional mortgage with a short loan term and a low down payment.
You can use a mortgage broker, an online platform, or a comparison website, such as nesto, to help you find and compare different lenders and mortgage products. You can also negotiate with the lender to lower or waive some of the fees, or ask the seller or the lender to pay some or all of them for you.
Conclusion
Getting a mortgage with bad credit in Canada is not impossible, but it can be challenging and costly. Having a low credit score can limit your options and increase your costs when it comes to getting a mortgage.
However, having bad credit does not mean you have to give up on your homeownership dreams. There are ways to get a mortgage with bad credit in Canada, as long as you are willing to work on improving your credit situation and finding the right lender for your needs.
