Bad Credit Mortgage Lenders in Canada [Latest Rates]

ByAlan Harder
If a low credit score is standing between you and a home loan, a bad credit mortgage may provide a path forward. This page will clarify your options, demystify the impact of poor credit on borrowing, and help set the stage for improving your financial health. With insights on navigating the mortgage landscape, you'll gain the knowledge to take the next step towards homeownership.

Key Takeaways

  • In Canada, bad credit mortgages are tailored for individuals with low credit scores
  • They are typically offered by B-lenders and private mortgage lenders
  • Bad credit mortgages often carry higher interest rates due to the associated risk
  • If you were declined by your bank or credit union because of your credit score, this might be an option for you
  • Improving your credit score is crucial for securing better mortgage options and interest rates
  • By consulting with a mortgage broker and carefully timing your mortgage application, you can improve your chances of approval

How Bad Credit Mortgages Work

A bad credit mortgage isn’t a specific mortgage product. It’s a general category with different mortgage options for those with a low credit score or poor credit history. Alt-A, B, and private mortgage lenders typically offer these types of mortgages, which are designed with flexibility to accommodate past credit challenges.

So why are bad credit mortgages necessary? In the past several years, mortgage policy changes have resulted in stricter regulations and lending requirements. This has made it more difficult for Canadians, particularly those without excellent credit, to be approved for mortgages through traditional lenders, such as banks and credit unions.

This tightening of mortgage policies has increased the demand for bad credit mortgage options.

Due to the associated risk, these mortgages come with higher interest rates. But don’t let that discourage you. The approval process for a bad credit mortgage can be quicker and require less documentation than a traditional mortgage loan.

How to Qualify for a Mortgage in Canada with Bad Credit

  1. Assess Your Credit Health
  2. Increase Your Down Payment
  3. Choose the Right Mortgage Broker
  4. Tips to Improve Your Chances of Approval

1. Assessing Your Credit Health: The Starting Point for a Mortgage Journey

Your credit health plays a critical role in your mortgage journey, but many people are unaware of the status of their credit history. Before you apply, you need to assess your current credit situation.

Here are the steps to follow to check your credit:

  1. You can request a free credit report from Canada’s two major credit bureaus: Equifax and TransUnion. You can also receive a free credit report and regular monitoring from Borrowell or Credit Karma.
  2. Review your credit report to check your payment history, outstanding debt balances, credit limits, the age of your credit accounts, etc.
  3. Use this information to evaluate your creditworthiness and determine your eligibility for a mortgage. If you’re unsure how to interpret the information in the report, speak with a mortgage broker or other financial professional who can help.

What Is a Good Credit Score?

Your credit score is like a financial report card. It’s summarized by a three-digit score, which is based upon many determining factors. Essentially, your credit score is an indicator of how well you manage credit.

In Canada, the credit score scale ranges from 300 to 900. Here’s how the different credit score ranges break down:

Credit Score RangeMeasureWhat It Means
760 or higher ExcellentA score of 800 or higher is considered excellent. Borrowers with this score shouldn’t have trouble getting approved for a mortgage and will have access to the best possible rates and most flexible mortgage options.
725 to 759Very GoodA score between 720 and 799 is considered very good. Borrowers with a score in this range should have no problem securing a mortgage with a traditional lender.
660 to 724GoodA credit score between 650 and 719 is still considered good. You can still qualify for a mortgage with a Prime lender but may not qualify for the best rates or terms.
560 to 660FairIf your credit score is below 660, a mortgage lender may want to look more closely at your credit before approving your application. If your score is on the low end of this range, you likely won’t qualify for a mortgage with a Prime lender.
Below 560PoorIf your credit score is below 560, you will likely need to seek a mortgage through a private mortgage lender who is willing to disregard your poor credit history in favour of other criteria, such as equity (down payment), and income.

Conventional lenders usually require a minimum credit score of around 640 for mortgage approval. If your score falls below this threshold, you may have to consider other options, including a private mortgage.

Your credit score also determines the interest rates offered to you. A higher credit score gives borrowers access to the best mortgage rates, with 700+ being the most favourable range. Conversely, a low credit score can result in higher interest rates and higher mortgage payments and costs.

For this reason, improving your credit score is like an investment in your future – every point counts!

2. Increase Your Down Payment: The Key to Unlocking More Possibilities

The larger the down payment, the lower the risk for the lender. Why is that? When a borrower has more skin in the game, it reduces the likelihood that they will default on their mortgage, even in the face of extreme financial hardship. The more equity you have, the more you will work to protect your investment.

For this reason, having a larger down payment can significantly influence your mortgage approval, especially for those with poor credit. Think of it as a key to unlocking more mortgage options and securing better interest rates.

If your credit is below 640, you’ll typically need a down payment of at least 20%.

Remember, a larger down payment has the side benefit of reducing your monthly mortgage payment. This frees you up to pay down other debts, further strengthening your credit score.

Also, a larger down payment will entice more lenders to compete for your mortgage business. This may help you secure better interest rates, even with a less-than-stellar credit score. A larger down payment (20% or more) also eliminates the need for mortgage default insurance, saving you thousands of dollars by avoiding CMHC premiums.

3. Choose the Right Mortgage Broker for Your Financial Scenario

Borrowers with bad credit must often secure a mortgage with an alternative lender, such as a B-lender or private mortgage lender, due to their flexible lending policies. A mortgage broker who specializes in bad credit mortgages can help you choose the right mortgage product and negotiate with lenders on your behalf.

A mortgage broker can also provide you with the right strategy to improve your chances of mortgage approval by recommending one or more of the following tips.

Tips to Improve Your Chances of Mortgage Approval

If a poor credit score is standing in your way of buying a home, consider the following steps to increase your chances of approval:

1. Add a cosigner or co-borrower: Adding a cosigner or entering into a joint mortgage can be a viable strategy to boost your mortgage approval chances. Here are some benefits of having a cosigner:

  • Cosigners with strong credit histories can bolster your mortgage application
  • They can help you secure approval from conventional lenders
  • They can help you obtain better interest rates

Keep in mind that sharing the responsibility of a mortgage with another person (or persons) comes with its own set of challenges. Cosigners and joint mortgage holders become equally liable for making repayments. If you can’t make your mortgage payments, they become responsible for ensuring the mortgage is maintained in good standing.

2. Address your debt: If your debt levels are too high to qualify for a mortgage, you may be able to consolidate your debt by transferring balances to lower-interest credit cards, taking out a debt consolidation loan, and working to pay down high-interest debts. Consider boosting your income through additional work or side hustles to increase your cash flow. All of these steps can help you improve your debt service ratio and mortgage affordability.

3. Repair your credit: If you have unpaid collection items or other delinquencies on your credit report, there are steps you can take to repair your credit. First, obtain a free copy of your credit report from Equifax or TransUnion. When you receive your report, check for and dispute any inaccuracies. From there, work to repay any unpaid collection items as quickly as possible and make all future payments on time. If necessary, consider getting a secured credit card to rebuild credit. Over time, this will reflect positively on your credit report.

4. Manage your credit utilization: Credit utilization is one of the main factors affecting your credit score. It refers to the amount of available credit you use compared to your total credit limit. Ideally, your credit utilization should be kept below 30% of your total credit limit, as it demonstrates responsible credit management and positively impacts your score.

You can manage your credit utilization by maintaining low balances on credit cards. Increasing your credit limit without increasing spending can also improve your credit utilization ratio. However, this should be done cautiously to avoid the temptation to overspend.

When to Consider Waiting: Timing Your Mortgage Application

Timing is crucial when applying for a mortgage, as it can significantly influence your interest rates and loan approval. It’s important to carefully consider the timing of your application to secure the best possible terms. Sometimes, waiting to improve your credit score before submitting a mortgage application can lead to easier approval and more favourable interest rates.

Moreover, waiting for lower interest rates before applying for a mortgage can substantially improve the loan’s affordability. After all, patience is a virtue that can pay off in the long run.

If you have a 20% down payment, don’t hesitate to consult a mortgage broker to explore your options. There are lenders available who are prepared to offer a mortgage, even if you’re only one day discharged from bankruptcy.

Frequently Asked Questions (FAQs)

What is the lowest credit score allowed for a mortgage?

Conventional lenders usually require you to have a credit score of 640 or higher. However, many B-lenders and private mortgage lenders have no minimum credit score requirement.

Can you get a mortgage with a poor credit score?

Getting a mortgage with a poor credit score is possible but may come with higher costs.

What is the minimum credit score for a mortgage in Canada?

In Canada, the minimum credit score required to qualify for a mortgage with a prime lender can range from 600 to 680, depending on the lender and type of mortgage. Aiming for a credit score above 700 is advisable for optimal chances of approval. The minimum credit score with a B-lender or private lender can go below 500, with several having no minimum score.

How can I improve my chances of mortgage approval?

Consider applying for a joint mortgage, adding a cosigner, saving for a larger down payment, or improving your credit before applying. These steps can improve your chances of mortgage approval.

How does my credit score affect my mortgage rate?

Your credit score directly impacts the mortgage rates you qualify for. A higher credit score opens the door to the best available mortgage rates.