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. Itβll probably cost you a bit more and involve more planning, but itβs totally doable!
When youβre 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 βA lendersβ. 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, itβs unlikely youβll be approved for a loan by one of these A lenders.
Next, look to alternative or subprime lenders, commonly referred to as βB lendersβ. These financial institutions and trust companies are also regulated, but work almost exclusively with people who have less than ideal credit scores. Theyβll have lower credit score minimums and easier to meet stress test requirements.
Finally, if youβre unable to qualify with an alternative lender, look to a private mortgage lender. Theyβll be the easiest to qualify with, however, youβll pay a premium as they also have the highest rates.
The key driver in getting approved for a mortgage with bad credit is being . 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 youβre seen as low risk and unlikely to default on your payments. If you have poor credit youβre 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 youβre 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 youβll 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. Everyoneβs plan will be different because it will be unique to their situation and timeline, but here are some common tips to keep in mind:
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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 in place so that your spending and savings are on track. When youβre 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.
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