Bad Credit Mortgages

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Credit Score Ranges in Canada

Having bad credit can hurt your chances of getting a mortgage, and with some mortgage lenders having a minimum credit score required for a mortgage, you might not even be able to apply for a mortgage with some lenders. Generally, a credit score below 600 is considered to be a bad credit score. Lenders that are willing to lend to borrowers with a bad credit score will require you to pay a higher mortgage rate, which can make a bad credit score a very costly status to have. Since bad credit mortgages are usually a temporary and last-resort measure, the typical term length for a bad credit mortgage is 6 months to 2 years. You’ll need to improve your credit during this time. If you have strong family or friendship relations and your relations have high credit as an alternative to a lender with a lower standard and higher mortgage rate, you can ask one of your relations to cosign your mortgage with a traditional lender.

However, having a bad credit score doesn't mean the end of your home buying journey, and it also shouldn't dash your dreams of home ownership. Here's how you can get a bad credit mortgage in Canada, and what you can do if you find yourself struggling to get a mortgage with a poor or non-existent credit history.

Your credit report is used in all aspects of life, from signing up for a cell phone plan or utility service to applying for a job or looking for insurance. This is no different when applying for a mortgage. Your mortgage lender will look at your credit history and your credit score to see how you have been handling credit with other creditors. If you’ve had a rocky past with other lenders by not paying on time or even by defaulting on previous loans, this will be a large red flag that your lender will carefully scrutinize.

Lending out hundreds of thousands of dollars to someone is something that mortgage lenders take very seriously, which is why having a good credit score is so important when applying for a mortgage. Your credit score is calculated based on your credit report. Your credit report contains information that lenders have sent to Canada's two main credit reporting agencies: Equifax Canada and TransUnion Canada.

Your credit report contains information such as your payment history, the balance of your debt, your credit limit and the age of your accounts, the type of debt that you have, any bankruptcy or past-due collections history, and a record of when lenders have checked your credit report.

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Bad credit information, such as bankruptcies, can stay on your credit report for six years in Canada. This means that your mortgage lender will see adverse credit information even if it occurred years ago. Some negative credit data can be removed earlier, such as consumer proposals being removed three years after you paid off all debts, or debt management plans being removed two years after you paid off all debts.

Missed payments, bankruptcies, consumer proposals, and past-due accounts sent to collection agencies will all reduce your credit score. TransUnion keeps your bankruptcy on file for longer in certain provinces, such as seven years for Ontario. If you’ve already declared bankruptcy in the past, any future bankruptcies will stay on your credit report for 14 years. Your previous bankruptcy will also re-appear on your credit report.

The Government of Canada has plenty of information on how long information stays in your credit report. This is especially important if you’re thinking about buying a home in the future. Declaring bankruptcy will make it very hard to qualify for a mortgage for the next six to seven years. Even smaller delinquencies, such as having non-sufficient funds (NSF) on a cheque, can stay on your credit report for six years, as Equifax’s credit report contains your banking history.

Good information, such as timely payments, can stay on your credit report forever. Being responsible with debt will increase your credit score and show potential lenders that you can handle a mortgage.

According to Borrowell, your credit score can drop by 150 points just from one late payment. However, not all late payments are reported to the credit bureaus. Making a payment a few days after the due date doesn't automatically result in a massive drop in your credit score. While your creditor may charge a late penalty fee, charge interest on the overdue amount, or increase your interest rate if you've had previous late payments in the same year, your late payment won’t show up on your credit report if you made the payment within 30 days of the due date.

If your late payment is more than 30 days late, your late payment can show up on your credit report and negatively affect your credit score. Late payments are categorized based on how late they are: 30-day, 60-day, 90-day, and 120+ days. The later your payment, the worse the impact is on your credit.

Once a late payment has been reported to Equifax or TransUnion, the late payment will stay on your credit report for up to six years. Once your payment is more than 120 days late, your lender might decide to write off your account, also known as a charge-off. Your lender has given up on collecting from your delinquent account and will usually hand off your debt to a collection agency. This will have a very large negative impact on your credit score.

Not all borrowers will face the same impact from a late or missed payment. Borrowers with a higher credit score will encounter a larger drop in their credit score compared to a borrower who already has a low credit score.

Even so, the late repayment will stay on your report for years even after you have repaid the amount due. While you can try to negotiate with your lender to have the late payment removed from your report, it will still take you a long time to build your credit score back up.

Mortgage lenders will look at a variety of information and resources when assessing your mortgage application. They’ll want to have a comprehensive overview of your current financial situation, but a detailed look at your past is equally as important. Having plenty of money and financial resources might not mean much to a lender if you regularly miss your mortgage payments and act recklessly. A credit score is a simple way for lenders to easily screen out unqualified and risky borrowers.

When looking at your credit score, you’ll see a three-digit number that is between 300 and 900. The higher your credit score, the better your creditworthiness. The lower your credit score, the lower your credit rating. Most Canadians fall in the upper end of this range.

The Canada Mortgage and Housing Corporation (CMHC) collects data on Canada's housing market and debt, including on credit scores of mortgage borrowers. According to the CMHC’s 2020 Q4 Mortgage and Consumer Credit Trends data:

• The CMHC found that the average credit score of Canadians that don't have a mortgage was 753 in 2020.
• For Canadians that do have a mortgage, the average credit score was 765.
• Digging deeper, 87.71% of mortgages in 2020 were held by borrowers with a credit score of 700 or higher.

What does this mean to you? If you have a credit score less than 753, that means that you have a below-average credit score. You might not get the absolute best mortgage rates, but your fair credit score can still get you a mortgage at many lenders. But at what point does a fair credit score turn into a bad credit score?

Bad Credit and Insured Mortgages

You might have heard about CMHC-insured mortgages, which are mortgages that have mortgage default insurance provided by the CMHC. Insured mortgages are intended to protect mortgage lenders from risky borrowers, and more specifically, they are for high-ratio mortgages where the borrower puts down a small down payment.

Interestingly enough, the CMHC has a minimum credit score of 600 in order to qualify for a CMHC-insured mortgage. If you have a credit score less than 600, the CMHC considers you to be too risky to qualify for their mortgage default insurance. Canada’s alternative private mortgage insurers, such as Sagen, also have a minimum credit score requirement of 600 for high-ratio insured mortgages.

Being ineligible for CMHC insurance is a sign that you have a bad credit score. Not meeting CMHC’s minimum credit score requirement can disqualify you from many mortgage lenders that only offer CMHC-insured mortgages, such as some B-Lenders. Having a bad credit score doesn’t mean that you will never qualify for a mortgage, but it does mean that you have less options when it comes to mortgage lenders available for you.

Most banks in Canada require a minimum credit score of at least 600 to get a mortgage, which means that having a credit score less than 600 will cause you to be rejected by Canada’s major banks. Many private mortgage lenders have no such requirement, and so they and B lenders are some of the only alternative mortgage lender options available to those with bad credit.

Getting a bad credit mortgage from a private lender, sometimes known as a subprime mortgage, is an option since private lenders are more flexible and have less stringent lending requirements compared to the major banks. This allows them to help you no matter your financial situation. Rather than focus on your credit score and credit history, private lenders will place more emphasis on your home equity. If something goes south and you default on your bad credit mortgage, private lenders want to be able to sell your home quickly through a power of sale while recouping the full amount of their investment.

However, be aware that a private mortgage can be much more costly than one from a traditional bank. Private mortgage rates can be multiple times higher than regular mortgage rates. You’ll also need to have a large down payment or home equity, as in a low loan-to-value ratio (LTV), in order for private lenders to take on your bad credit mortgage. Since having a low LTV will make it easier for private mortgage lenders to recoup their lost investments on defaulted bad credit mortgages, private lenders can even work with those who have recently gone through a bankruptcy.

B-Lenders can be another option for those with bad credit. You can use mortgage brokers to help connect you to B-Lenders and private lenders. For example, MERIX Financial’s NPX mortgages target those with bad credit scores or with non-traditional income. B-Lenders and private lenders may charge additional fees to your mortgage, which can significantly add onto your cost of borrowing. These fees are usually based on the total amount that you are borrowing.

For example, a private mortgage lender might charge you 2% in lender fees on a $500,000 mortgage. This would be $10,000 in upfront fees. If you were to renew your private mortgage or switch to another private lender, you may still have to pay private lender fees again. This is why it’s important to have an exit plan when going with a private lender. Instead of having your bad credit mortgage stay as bad credit, you’ll want to work to improve your credit score so that you can transition to less costly lenders.

There are plenty of private mortgage lenders that offer bad credit mortgages in Canada. A few examples include Alpine Credits, Prudent Financial, Clover Mortgage, Canadalend, and Guardian Financing. For private mortgage lenders in Ontario, a few examples include Castleton Mortgages, MortgageCaptain, and MortgageKings. You might be required to go through a bad credit mortgage broker in order to access some private lenders, as some may only work through brokers.

Some private lenders have no minimum credit score requirements, and some even allow you to make interest-only payments on your mortgage. This can help you keep up with your payments if you are having cash-flow issues. Making regular mortgage payments to a private lender can also help improve your credit score, making it easier to eventually refinance your mortgage at a lower mortgage rate with another lender. Additionally, many private lenders also offer bad credit loans.

B Lenders are non-traditional banks, such as credit unions, monoline mortgage lenders, and mortgage investment corporations. The difference between B lenders and private lenders is that B lenders usually follow federal regulations that are imposed upon federally regulated banks, and more specifically, they may refer to the Office of the Superintendent of Financial Institutions (OSFI) B-20 guidelines on residential mortgage underwriting.

B-20 sets minimum requirements when assessing a borrower. While B lenders can choose to follow them, and some B lenders do enforce them in their policies, not all B lenders do. On the other hand, private lenders do not follow B-20.

This makes B lenders more of a mixed bag when looking for a mortgage with bad credit. Some B lenders, such as many monoline lenders (such as MCAP or CMLS) and credit unions (such as Meridian or Alterna Savings) offer CMHC-insured mortgages, and so they must follow CMHC’s underwriting guidelines for high-ratio mortgages. This includes a minimum credit score of 600.

Other B lenders have looser requirements. For example, MERIX Financial has a whole product line that caters to borrowers with blemished and bad credit.

Since having bad credit already closes many doors, it’s best to try as many options as you can. B lenders can be a tolerable alternative if you’ve been declined by the banks. B lender mortgage rates are generally lower than private mortgage rates, and you’ll also encounter fewer fees with B lenders.

Just as an example, credit union mortgage rates will almost always be lower than private mortgage rates. The main question is whether your local credit union will accept your bad credit score, which private lenders might happily accept in exchange for very high rates and fees. When looking for a bad credit mortgage, it might be wise to apply at B lenders first before going to private lenders.

It’s important to keep in mind that your credit score isn’t the only thing that mortgage lenders look at. If you are not able to improve your credit score and don’t want to consider a private mortgage lender, you can consider other options. Making a large down payment can make it easier to be approved for a bad credit mortgage. If you can find a co-signer, their credit score will be considered as well. This is helpful if they have a strong credit score or more income.

If you are over 55 years old, you are eligible for reverse mortgages. Reverse mortgages have no income or credit score requirements, and there are also no mortgage payments required either. This is particularly useful for seniors as a source of income during retirement.

Renting instead of buying a home might also be a temporary solution in the meantime. If there is a particular property that you would like to purchase, but cannot afford to do so currently, rent-to-own home programs allow you to rent the home for a period of a few years, with a portion of your rent payments going towards your eventual down payment on the house. This allows you to save up money until you can afford a mortgage.

A bad credit score means that you are riskier to a lender compared to a person with a good credit score. A poor credit score might mean that your mortgage rate will be higher, you might qualify for a lower mortgage amount, or you might not qualify for a mortgage at all.

Having an insured mortgage will also let you make a down payment on your home for as little as 5%. Uninsured mortgages require a down payment of at least 20%. Since you won’t be able to qualify for an insured mortgage if your credit score is less than 600, you will need to make a larger down payment on your home.

It might be very difficult to be able to save up a 20% down payment, let alone a 5% down payment, which is why some provinces offer down payment assistance programs for first-time homebuyers. Even so, higher bad credit mortgage rates will mean that you will be paying more if you have a low credit score. Being forced to use private lenders can mean that your rate can be multiple times higher than one from a major bank.

Many Canadian lenders allow new immigrants with little or no Canadian credit history to be eligible for a mortgage through special programs. For example, RBC, TD, CIBC, and BMO all offer Newcomer programs that don’t require any Canadian credit history. However, they are only available to newcomers that have been in Canada for five years or less. Some lenders can also give you the option of using your credit history from another country if you don’t have a Canadian credit history.

If you've been in Canada for longer than five years, some lenders may consider alternative credit data, which would be creditors that do not report information to Equifax or TransUnion. Showing proof that you have made consistent payments on-time can demonstrate that you are financially responsible. This can include your rental payments to a landlord, your monthly utility bill, or your cell phone plan. Lenders will usually want to see at least 12 months of payment history.

The best time to start fixing your bad credit is right now! Your credit score goes hand-in-hand with mortgage approval, so you shouldn’t try to leave it until the last minute when your lender pulls your credit report. Improving your credit score can help you not only get a better mortgage rate, but also to get higher credit limits, be seen as a better tenant when applying for a rental apartment, and get a lower car insurance rate in most provinces. The exception is Ontario and Newfoundland, where having a bad credit score won’t affect your car insurance premiums.

Paying your bills on time and not carrying a large balance can help to improve your credit score. Limiting the number of credit card and loan applications that you make will also prevent hits to your credit score, as each inquiry can reduce your score.

If you find that your credit score hasn’t improved enough in time, you can still choose to go with a bad credit mortgage in the meantime. Bad credit mortgaglooseres can last from 6 months to a few years. Use this time to continue to improve your credit. Once your bad credit mortgage term is up, you’ll be able to switch to a lender that offers lower mortgage rates that you might not have qualified for previously.

The Financial Consumer Agency of Canada has plenty of tips on how you can improve your credit score.

Bad credit mortgages are only meant to be used as a temporary stopgap measure while you get your finances in order. You wouldn’t want to stay with a bad credit mortgage lender for long either. That’s why you’ll usually see bad credit mortgages with term lengths from 6 months to 2 years. You’ll need to have an exit plan when applying for a bad credit mortgage so that you can transition back to a B lender or A lender.

Bad credit mortgage lenders look towards how marketable your property is. If your home is located in Toronto, a bad credit mortgage lender might be more willing to lend you more money when compared to a home in Nunavut. Having a home in an urban area will also possibly result in lower bad credit mortgage rates.

Leaving your partner off of the mortgage can help get you a better mortgage rate. If you have a good credit score and income level, you'll likely not need to resort to a bad credit mortgage if you apply for a mortgage on your own. Applying in just your name would mean that only your credit score will be looked at, but it also means that only your income will be considered.

A joint mortgage with a spouse or partner will include their income into the calculation, but it will also bring in their credit score and credit history. If they have a particularly bad credit score or a tarnished credit history, such as a lengthy past of previous bankruptcies, then your mortgage application might not be looked at so favourably.

Many bad credit mortgage lenders offer very fast turnaround times, often within a few days. For example, Alpine Credits and TurnedAway both offer 24-hour approvals. You might even get your bad credit mortgage approved on the same day with some lenders.

You’ve just been declined for a mortgage from a major bank or you’ve just checked your free credit score online and you’ve found that you have bad credit - now what? Knowing that you have bad credit when you are already applying for mortgages and need one now might be a sign that it’s too late to significantly improve your credit score. That’s why it’s important to proactively check your credit well in advance and to have a plan in place.

Improving your credit score can be as easy as making your payments on time - but of course that’s easier said than done. Create reminders for payment due dates to help avoid making late payments. Older credit accounts are more valuable than new accounts, so don't cancel old credit cards as you will want your credit history to be long.

Not maxing out your credit cards will also prevent hits to your credit score. Keeping your credit card balances to less than 35% of your credit limit will help to improve your credit. A large number of inquiries will also reduce your credit score. An inquiry is every time you apply for credit and someone checks your credit report. Lots of credit checks might show that you're desperate for credit and are applying at a large number of lenders.

Finally, sometimes there are mistakes on your credit report, such as a lender reporting a payment as late even if you made it on-time. Make sure to carefully check your credit report and report any wrong information to the credit bureau.