What is a bad credit score?
A credit score is a kind of shorthand that mortgage lenders use to assess your reliability as a borrower. A low credit score suggests to them that you aren’t good at making your payments on time, already have too much debt (or access to debt) relative to your income, or simply haven’t used credit products before so they aren’t sure you if are a trustworthy borrower. You can read more about factors that affect your credit score.
Credit scores in Canada range from 300 (worst) to 900 (best). More specifically, a score above 680 is considered good; scores between 600 and 679 are fair, and anything below 600 is poor. When you have a bad credit score, financial institutions see you as a bad risk and will either refuse to loan you money or if they do, will charge you a high rate of interest.
In terms of mortgages, banks typically will not approve borrowers with credit scores below 600 and trust companies require a credit score of 550 or above. If you have a credit score of less than 550, you may be able to obtain a high-risk bad credit mortgage from a private lender.
How do you check your credit score?
There are a few ways you can obtain your credit score:
- Order your credit report (which includes your full credit history, not just your score) online for a fee from one of Canada’s two credit reporting agencies, TransUnion.ca or Equifax.ca
- Check your credit score through a website like CreditKarma.ca or Borrrowell, both of which allow you to access your score for free
Keep in mind your score may vary, and that it is possible to receive a different number from each site. If you want more information on why you got the score you did, you’ll need to get your full credit report—which isn’t a bad idea as it may include errors that you can address directly with the issuing credit bureau to improve your score.
Tips for getting a mortgage with a bad credit score
If you’ve determined that you have bad credit for a mortgage in Canada—and there are no mistakes on your credit report that might be incorrectly bringing your score down— there are still a number of options available that can help when buying a house.
Use a mortgage broker
If you have bad credit, mortgage brokers may be able to negotiate a loan on your behalf. These licensed professionals are in the business of securing mortgages for clients from a variety of lenders, so they will know which ones (if any) service borrowers with a similar credit score to yours. Breezeful, for example, will not only connect you with lenders that have flexible eligibility requirements but will also assist in repairing your credit.
Get a co-signer
Lenders want to be sure you can make your mortgage payments in full and on time. So, if your credit history is shoddy, you can offer reassurance by having someone with good credit, such as a parent, co-sign your mortgage. What this means is that your co-signer is on the hook to make your payments if you can’t. Obviously, both you and your co-signer must be comfortable with such an arrangement and understand the risks.
Beef up your downpayment
As previously mentioned, some private lenders will issue bad credit mortgages (also called high-risk mortgages), but only to borrowers who have a downpayment of at least 20% of the home’s purchase price. With the average cost of a home in Canada now at $586,000 (and even higher in large centres such as Toronto and Vancouver), that 20% downpayment will likely be in six-figure territory, or $117,200, on average.
If you’re thinking: “I wouldn’t have bad credit in the first place if I could save up more than $100,000,” you’re not wrong. But all lenders are in it for profit, and if your credit score makes you a bad risk, they want the assurance of that 20% equity in your home to secure your mortgage.
Improve your credit
It may not be the message you want to hear, but if you have a bad credit score the best thing you can do as a prospective home buyer is fix your credit. By doing so, you’ll be eligible for more favourable interest rates, which will not only lower your monthly payments but will also save you many thousands of dollars over the life of your mortgage.
Not sure where to start? Check out our tips for improving your credit score. But one of the quickest ways to boost your credit score is to join a credit-boosting program. For instance, MyMarble is a financial portal which allows you to connect your financial information and offers you expert insight on your finances, free credit score monitoring, and access to Maestro, an educational resource with over 25 modules on debt, credit, and budgeting. MyMarble also offers a paid premium plan which includes a service called Score-Up — intelligent software that can help you achieve your desired credit score in as little as three months.
The downsides of a bad credit mortgage
Aside from improving your credit, all of the methods outlined above, come with drawbacks.
While a mortgage broker can often obtain better interest rates for bad-credit borrowers than they might get on their own, it’s still going to be a much higher rate of interest than for good-credit borrowers. To understand what that means in real terms, ask the broker (or use a mortgage calculator) to determine how much interest you’d end up paying during the mortgage term (and over the entire mortgage amortization) at the rate offered, as compared to the rate you might get if you could improve your credit.
Also, keep in mind that although mortgage brokers are usually paid a finder’s fee by the lender—making the service free to clients—that isn’t always the case for bad credit mortgages. So, be sure to find out if your broker charges any additional fees. If so, ask how much before agreeing to anything. There are usually other professional fees that come along with bad credit mortgages as well, such as the services of real estate lawyers and home appraisers.
Getting a parent or someone else to co-sign your mortgage also has its potential problems, as the co-signer is essentially listed on the title as one of the owners of the property and may want to be compensated if or when you sell the home.
Finally, be aware that if you have a bad credit mortgage with a private lender and you default on your payments, the lender may sell your home to recoup what they are owed.
The bottom line
Getting a bad credit mortgage in Canada is not for the faint of heart. Bad credit mortgages come with significantly higher interest rates and often require a downpayment of at least 20%, plus your home may be repossessed and sold if you default on your payments. Improving your credit is the best course of action to get more favourable mortgage terms. But you can also consider getting a mortgage co-signer, or consulting a mortgage broker, such as Breezeful, to help you secure a better rate.