In Canada, your credit score is an important aspect of your financial identity — and it can mean the difference between being approved and rejected for many different types of loans and banking services.
One type of loan that can be difficult to get when you have poor credit is a mortgage. This means that buying a home can be more difficult when you have existing bad credit from previous debts, or even from a lack of financial experience.
Luckily, having bad credit doesn’t mean you have no options. You simply have to look for an alternative to the traditional, long-term mortgages offered by “A” lenders like banks.
What is Poor Credit?
If you live in Canada, have a bank account, and are 18 or over, then you have a credit score. That is, a 3-digit number that lets banks and other financial entities know, on average, how likely you are to pay back debts and maintain a good financial standing.
Credit scores are assigned between 300 and 900, with 900 being the best possible score and 300 being the worst. Scores of 650 and up are considered “good”, with scores between 750 and 900 considered “excellent.”
There are many factors that can affect your credit score — being in debt can, of course, negatively affect your score, but usually only if you’re falling behind on your payments. Taking out a loan or credit card can actually improve your score, because it gives you a chance to prove to the banks that you’re trustworthy. Other, less-obvious factors that can influence your score are variety (your score can improve if you use a wider range of banking services, like accounts, investments, and loans) and age (younger people tend to have lower scores, usually because their credit history is shorter, and they haven’t used a wide range of banking services yet.)
If you want to get a traditional bank mortgage, you’ll need a credit score of at least 600, though the better your score, the better your chances of securing a loan with a good interest rate. Some trust companies will offer loans to people with slightly lower credit scores, around 550 and up.
How Can You Get a Mortgage With Bad Credit?
The average Canadian credit score, as of 2019, is around 650, with about 20 percent of Canadians having scores below 600. This means that there’s already plenty of demand for mortgages from those who would have difficulty getting a mortgage from a bank. Buying a home with bad credit is possible, you’ll just have to approach someone other than a bank.
This is where alternative lenders and mortgage brokers come in. Alternative lenders can be private investors, Mortgage Investment Corporations, or other independent financial entities that are not regulated by the provincial or federal government. These alternative lenders don’t have to look at your credit score to approve you for a loan — they’re generally more concerned about the value of the property you want to mortgage.
Alternative lenders will take a look at your credit history and current financial situation, but they’ll also use a metric called the “Loan to Value Ratio,” or LTV, to determine if you can be approved. The LTV is basically the value of any existing mortgages or loans against a property, divided by the most recent assessed value of that property. As long as the LTV is 80 percent or lower — indicating that at least 20 percent of the property value is available as equity — you can be approved for a bad credit mortgage.
Keep in mind that you will still have to shop around to find a loan that works for you, and private lenders still have the right to power of sale in the event that you default on loan payments. Avoid predatory lenders or loan deals that seem “too good to be true” — and make sure that you can actually afford to pay back a large loan.
What’s the Difference Between a Traditional Mortgage and a Bad Credit Mortgage?
Bad credit mortgages, like traditional mortgages, come in a variety of different packages, and can vary in terms of length, amount, and interest. Generally, though, bad credit mortgages are smaller and designed for shorter terms than bank mortgages. Additionally, bad credit mortgages often carry significantly higher interest rates than traditional bank mortgages — this is to help mitigate the risk to the lender.