How to Get Approved For a
Mortgage With Bad Credit
Understanding the Challenge of Bad Credit
Bad credit, often a reflection of past financial difficulties, can pose a significant challenge when attempting to secure a mortgage in Canada. Lenders may be hesitant to provide mortgages due to the perceived risk associated with bad credit. However, it’s important to remember that a poor credit history doesn’t necessarily mean homeownership is out of your reach. It’s essential to understand what constitutes bad credit. Factors such as late payments, bankruptcy, and high credit utilization can negatively impact your credit score. Each of these factors is weighted differently, with payment history being the most significant contributor to your credit score.
The Critical Role of Credit Score in Mortgage Approval
A credit score is a critical factor in the mortgage approval process. Canadian lenders use it as a measure of your ability to repay the mortgage. A low credit score may indicate a high risk, which could lead to higher interest rates or even mortgage decline. It’s important to understand that different lenders have different criteria for what they consider a ‘good’ credit score. Some may be willing to work with borrowers who have lower scores, while others may not. Understanding how your credit score is calculated can help you take steps to improve it.
Strategies for Securing a Mortgage Despite Bad Credit
Long-term Strategy: Improving Your Credit
Improving your credit is a long-term strategy, but it’s the most effective way to enhance your chances of securing a mortgage. Regular bill payments, and debt reduction can help boost your score. Diversifying your credit mix, which means having a combination of different types of credit, such as credit cards, car loans, and a mortgage, can also be beneficial, as long as you make the required payments on time. Pay at least the minimum amount to your credit cards. If you can pay more than the minimum, even better, you will be improving your credit, and saving interest at the same time. The longer your history of timely payments, the better you look to lenders. Additionally, keeping your credit card balances low and only applying for new credit when necessary can also boost your credit score.
Regularly Checking Your Credit Report
Regularly checking your credit report can help you understand your credit status and take steps to improve it. It can also help you identify errors on the bureau, that would need to be addressed. Both Equifax and TransUnion, the two credit bureaus in Canada, allow you to request a free copy of your credit report online.
Considering a Larger Down Payment
One way to help get approved for a mortgage even if you have bad credit is to have a larger down payment for your home. In Canada, you need at least 5% down payment to buy a house. However, if your credit score is low, you might not qualify for mortgage default insurance, and a 20% or more down payment will be required.
A larger down payment can counterbalance the risk associated with bad credit. It decreases the loan-to-value ratio, making you more appealing to lenders. While it may be challenging to save up a larger down payment, it can pay off in the long run by increasing your chances of mortgage approval and potentially securing a lower interest rate. Furthermore, a larger down payment could mean smaller mortgage payments and less total interest paid over the life of the mortgage.
Considering a Co-Borrower, Co-Signer or Guarantor
If you have bad credit, another strategy to consider is adding another person to your mortgage application. This could increase the likelihood of approval by taking into account their income and credit. This person should have a good credit score and a stable income. Having a co-signer reduces the risk for the lender, making them more likely to approve your mortgage application. The lender may ask that this person is added to the title of the property, so be careful who you consider. Usually a spouse or a close family member should be the ones considered for this, assuming that this arrangement won’t negatively impact their own financial obligations.
Exploring Various Mortgage Options
There are multiple mortgage options available that cater to individuals with bad credit, as some lenders specialize in providing mortgages to individuals with bad credit. These lenders often have more flexible approval criteria but may charge higher interest rates, and/or fees to offset the increased risk.
Working with B Lenders
B lenders, also known as alternative lenders, are willing to accept higher levels of risk than traditional lenders. They offer mortgages to individuals with lower credit scores. While B lenders often charge higher interest rates to offset the increased risk, they can be a viable option for individuals with bad credit. A mortgage broker should be able to assist with placing you with an alternative lender if this type of lending was suitable for you.
Engaging with Private Lenders
Private lenders are another option for individuals with bad credit. These lenders offer short-term mortgage solutions, often with higher interest rates. However, they have less stringent approval criteria, making them an option for individuals who might not qualify for a mortgage with traditional lenders. Again, a mortgage broker should be able to assess your situation, and if this type of financing was the most appropriate option for you, they should be able to assist you with it. Keep in mind, that it is the broker’s responsibility to explain to you why this is the most appropriate option, and if there was a less costly option they should be recommending that instead.
Working With a Mortgage Broker
Mortgage brokers may know which lenders are the best match for your circumstances. They have access to a wide range of mortgage products and lenders and can help you find a lender who specializes in working with borrowers who have bad credit. If you are deciding to work with a mortgage broker/agent make sure that they have the experience in dealing with the different lenders as described above, as well as having the proper licensing category to handle this type of financing. Some agents (Agent Level 1) are only authorized to deal with institutional lenders, in which case they may not have access to the lenders that work with borrowers with challenged credit, meaning that they can’t help you.
Working with TheBroker.ca Ltd.
TheBroker.ca Ltd. specializes in assisting individuals with both good and bad credit to secure mortgages, by offering personalized advice and solutions. We work closely with clients to understand their unique financial situation and goals, and use this information to match them with the best mortgage options available.
Securing a mortgage with bad credit can be a challenge, but it’s not impossible. With patience, effort, and the right guidance, homeownership can be within your reach, regardless of your credit history.
If you’re ready to initiate your home financing process, or if you have any questions, please don’t hesitate to reach out to us at TheBroker.ca Ltd. You can contact us through our website or call us directly at (519) 252-9665. We are ready to assist you every step of the way.
Please note that this information is current as of the time of writing and is intended for general informational purposes only. It should not be relied upon as financial advice. Always consult with a mortgage professional for advice tailored to your specific circumstances.
This article was brought to you by TheBroker.ca Ltd., a licensed mortgage brokerage. Our licensing status with the Financial Services Regulatory Authority of Ontario (FSRA) can be confirmed through this link.