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:
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.
Planswell is a registered broker and we have access to multiple types of lenders, including alternative or private lenders that’ll work with clients with bad or blemished credit. We also have an entire team that’s available to coach you through the process, making sure your home ownership goal fits with your other financial goals.