In Canada, it is not unusual to have issues with your credit scores. This can be attributed to challenges like loss of employment, recession, or in our current climate, the impacts of COVID-19. Such problems can make the achievement of your home ownership dream seemingly further away than ever before.
Even so, you can still pursue your dream without waiting for your credit score to grow. The disclaimer is that mortgage options for poor credit often come at a price. But the financial sages behind MoneyWizard can help you obtain a mortgage—even with ‘bad’ credit. Read on to find out more!
Canadian Credit Score Values
Your credit score is a measure of your financial wellbeing, and shows lenders the potential for risk of the were to lend money to you. It represents how you have handled credit in the past and is meant to inform the lender’s decision.
People with a higher credit score have an advantage in accessing loans and low mortgage rates. If your credit score is between 680 and 900, you’ll qualify for a mortgage with an “A” level lender—these include major banks. However, if your credit score is below 600, you will likely only qualify for a mortgage with a alternative lender—and you won’t get today’s best mortgage rates. Of course, this doesn’t mean your dream of owning a home is over.
Concerned about your score? You can get a bigger picture of your credit health with a personalized credit analysis, credit monitoring and more from companies like TransUnion.
How Does My Credit Score Affect My Mortgage Rates?
As mentioned before, a low credit score mortgage will come at a price. This cost comes in the form of high lending rates. To give an overview, major banks in Canada give mortgages at approximately 2.54% interest rates to good credit score holders who will have to pay about CA$2,223 in monthly payments.
A fair credit score holder can obtain a mortgage from trust companies at a slightly higher rate of about 5.19%, which is about CA$2,927 in monthly payments. However, low credit scores attract high rates above 10%, which is about CA$4,419 monthly payments from private lenders.
What Should I Do In Order To Get A Mortgage With Bad Credit?
Work On Your Credit Score
To get low rates from major banks, also known as A-landers, you might have to improve your credit score. This is bound to take time. Some tips on how to go about this are:
- Timely payment of bills.
- Stay below your credit limit by limiting your spending. Your expenditure adds to the responsibility factor that goes to determine your score. It is advisable not to go below 30% of your credit.
- Limit the number of credit cards to avoid being considered to be in desperate need of cash.
- Maintain one account which can help you generate a good credit history.
The easiest way to know about your credit score is by checking it out. And don’t worry—checking your credit score won’t lower it. You can even enjoy unlimited access to your score with TransUnion credit monitoring. Sign-up today!
Make A Large Down Payment
Other than your debt level and income, the size of your down payment is also considered when processing loans. Canadian lenders require a minimum down payment of 5% of the total home price. However, with a lower credit score, it is advisable to have a higher amount in your down payment to curb the risk associated with a poor credit history. It is better if this amount is above 20% of the mortgage applied.
There are three advantages associated with a sizeable down payment. First, it gives the lenders confidence in your financial stability. Secondly, it will decrease the amount of monthly installments. Finally, you will not be required to pay a loan default insurance which is a requirement if the down payment is below 20%.
Find A Bad Credit Lender
Most Canadian banks will not approve mortgages for borrowers below 600 credit scores. With A-lenders off the list, you have to explore other lenders, referred to as sub-prime lenders or B-lenders. These lenders specialize in those who do not meet the minimum requirements for A-lenders as target clients. The other option to explore is private lenders who could consider your case even when you have gone through a bankruptcy proposal in the near past. You should be prepared to incur extra costs such as mortgage processing fees and broker’s fees.
Joint or Co-signer Mortgage
In Canada, it is possible to bring a third party to sign your mortgage as a guarantor. The co-signer agrees to pay your monthly payments if you are not able to pay. The benefit of this option is that the co-signers credit score is also considered.
If your co-signer has a good credit score, you can access better rates than trying it with your low credit score. The first challenge however, is that you put a lot of risk on the co-signer. As such, it is not easy to find someone who is willing to co-sign. Secondly, co-signer agreements might create conflicts when the home is sold.
A joint mortgage is another alternative to have a second credit score factored in. In this option, the home is shared jointly with an agreement to split the monthly installments equally among people who agree to live together.
Focus On The Next Renewal
Most mortgages provide room for renewal at the end of a predetermined term, usually five years. You can follow the tips above to improve your credit score before the end of the term to revise your mortgage terms. If your credit score improves enough, you could shift from a B-lender to an A-lender. The tip is to improve the score then look for a better mortgage rate during renewal rather than merely renewing with the current lender at current terms.
Additional Resources for First-Time Home Buyers
First-time home buyer? You probably have a lot on your mind. Thankfully, the financial sages behind MoneyWizard have got the resources, tips and financial support to help you on your journey!
- Start here! This step-by-step guide includes all the up-to-date information you need to help you make informed decisions and understand the home buying process in Canada… [Read more]
- To make buying your first home more affordable, the government offers numerous incentives— tax benefits, rebates, tax credits, or ways to fund your down payment. Find out if you’re eligible… [Read more]
- Mortgage pre-approval is not only easier but faster than the mortgage approval process. It also expedites closing on a mortgage when you’re ready. In other words, a mortgage pre-approval is your true first step to owning a home. Learn how to get pre-approved today… [Read more]
- While some suggests that you can spend ~32% of your income on housing and still be in good financial standing, not everyone should take this advice. Are you ready to own a home… [Read more]
- Depending on your strategy, successfully saving up for a down payment can be one of the most important steps in securing your financial future. It’s time to take the first step—we’ll show you how… [Read more]