Can you buy a home with bad credit?

Life is unpredictable, and sometimes periods of unexpected expenses, illness, or job loss can leave you with bad credit. This is a reality for many Canadians, and it can take a while to get back on track with your personal finances and to build up your credit.

This may mean delaying your dreams of home ownership, but the good news is that even with a low credit score or poor credit history you can still qualify for a mortgage. It’ll probably cost you a bit more and involve more planning, but it’s totally doable!

When you’re shopping around for a mortgage, start by seeing if you qualify for a mortgage with one of the big banks or major institutions, often called “A lenders”. These institutions are regulated and offer the most competitive rates. You can often get a slightly better rate if you have other services with that institution (like your investments, insurance, or bank accounts). If you have a credit score below 600, it’s unlikely you’ll be approved for a loan by one of these A lenders.

Next, look to alternative or subprime lenders, commonly referred to as “B lenders”. These financial institutions and trust companies are also regulated, but work almost exclusively with people who have less than ideal credit scores. They’ll have lower credit score minimums and easier to meet stress test requirements.

Finally, if you’re unable to qualify with an alternative lender, look to a private mortgage lender. They’ll be the easiest to qualify with, however, you’ll pay a premium as they also have the highest rates.

The key driver in getting approved for a mortgage with bad credit is being able to put down a larger down payment. Often, if you have bad credit, you’ll need to put a minimum of 20% down.

Lenders look at a variety of things when approving you for a loan including your credit score, income, and debt. If you have good credit you can get a mortgage from many lenders with only a 5% down payment, because you’re seen as low risk and unlikely to default on your payments. If you have poor credit you’re considered higher risk, so lenders will want to see a larger down payment.

The good thing is with a 20% down payment you won’t need to pay for CMHC mortgage insurance.

If you’re going to get a mortgage with an alternative or private lender, it’s important to have an exit strategy. The terms for these types of mortgages are typically only one or two years, and after your term ends you’ll want to move your mortgage over to an A lender where you can get a lower rate.

You’ll need to put a plan in place to establish your credit and you may want someone to coach you through this. Everyone’s plan will be different because it will be unique to their situation and timeline, but here are some common tips to keep in mind:

1. Establish credit through secured credit facilities. To re-establish credit you of course need to be using credit, but it might be hard to qualify for a typical credit card. With a secured credit facility you can get prepaid credit. For example you, write them a cheque for $1,000 and they give you a prepaid Mastercard for $1,000. What’s important is that they’re a credit facility that’s reporting to the bureau, therefore building your credit history. You can also do this with car loans and RRSP loans.
2. Have a few sources of credit that are reestablishing. You need at least two credit sources. The credit bureau will want to see those reporting for two or three years to get your score back up into a healthy range.
3. Show good credit management. Be extra mindful of your credit usage while you’re building your score back up. Lenders will be hypersensitive to any mishaps, so don’t make late payments, have delinquencies, or take on a lot of new debt.
4. Pay attention to timelines. You’ll need to be mindful of how long it will take to build up your credit and the length of the mortgage you’re looking at. If you went through a bankruptcy or consumer proposal there’s usually an end date to it (when your bankruptcy is discharged) and it’s only from that point forward that you’re reestablishing your credit. They fact that you’ve still been using a credit card through the process won’t count towards your credit reestablishment period. They want to see two or three (sometimes more) years of reestablished credit after you’ve been cleared.

Buying a home with poor credit is totally possible, it just takes extra planning. Before making any big decisions like home ownership, make sure you have a budget established and a financial plan in place so that your spending and savings are on track. When you’re ready to shop for a mortgage, we recommend working with a broker that can help you find the best rate and create a tailored plan for reestablishing your credit.