Home ownership is a dream shared by Canadians, with almost two-thirds of us owning homes. But sometimes life can toss a curveball our way and throw our finances out of whack. For instance, an unexpected job loss, a disability, a divorce, or even a global pandemic can derail our financial plans, affect our credit scores, and put our dreams of home ownership on hold. Some people may choose to wait for their finances and credit scores to improve before they purchase a home, while others may want to move forward. For Canadians who want to move forward, a bad credit mortgage may be an option worth considering. Getting a mortgage with bad credit is possible, but it will cost you more in interest charges and monthly payments.
In this article, we will discuss how bad credit mortgages work, their advantages and disadvantages, how to get a bad credit mortgage in Canada, and the role of reverse mortgages in improving your finances.
How bad credit mortgages work in Canada
Most mortgages in Canada are provided through the country’s biggest banks, who check credit scores as part of the process of granting mortgages. The big banks typically offer mortgages to individuals with good credit scores and higher incomes. A bad credit mortgage is usually applied for by individuals who have poor credit, bad credit, or no credit history at all – and who wouldn’t otherwise qualify for a mortgage in Canada.
In Canada, credit scores range between 300 to 900 and are assigned to individuals by Canada’s two major credit bureaus, Equifax and TransUnion. If you have a higher credit score, you are considered lower risk, which means you’ll have an easier time accessing loans and mortgages and will be able to borrow at lower interest rates. Big banks and other large, conservative lenders will typically approve mortgages to individuals who have good credit – with a score of 680 or higher. Bad credit mortgages in Canada – for those with credit scores of average or poor – are mostly available through alternative lenders and other channels.
|Credit Rating in Canada
The scores in the table are only guidelines, and sometimes they differ between the major credit bureaus. In addition, higher interest rates and tighter lending criteria have made many large lenders more cautious about who qualifies for a mortgage.
Bad credit mortgages in Canada: The pros and cons
For individuals who want to purchase a home, refinance an existing mortgage, or take out a second mortgage, there are some advantages to applying for a bad credit mortgage.
- Purchase a home sooner. Getting a mortgage with bad credit allows you to realize your dream of home ownership sooner.
- Improve your finances. A bad credit mortgage can be used to improve your financial situation by refinancing and consolidating high-interest debt into your mortgage.
- Repair your credit rating. Another advantage of a bad credit mortgage is that, as long as you make your mortgage payments on time, it gives you a chance to rebuild your credit rating and improve your credit score.
- Reapply for a conventional mortgage. Assuming you have improved your credit score over the course of your bad credit mortgage, you can even apply for a conventional mortgage when your bad credit mortgage comes up for renewal.
Of course, there are also disadvantages to getting a mortgage with bad credit, including:
- Higher interest charges. Bad credit mortgages typically come with higher interest rates. In fact, the lower your credit score, the higher the interest rate you will usually have to pay.
- Higher monthly mortgage payments. Higher interest rates mean you will have to make higher monthly mortgage payments, which may impact your cash flow.
- Fees associated with bad credit mortgages. You typically have to pay fees to set up a bad credit mortgage.
- Delay building wealth. The more you have to pay in interest charges over the course of your bad credit mortgage, the less you will have available to save for retirement and build your nest egg.
How to get a mortgage with bad credit in Canada
So let’s say you’ve checked your credit score and you fall in the category of average or poor, but still want to know how to get a mortgage with bad credit. The good news is there are steps you can take to make your dream of home ownership possible – and even more affordable – with a bad credit mortgage. Here are a few tips to help you get a mortgage with bad credit.
- Improve your credit score. As we saw above, improving your credit score may decrease the interest rate you pay on your mortgage. One of the best things you can do to improve your credit score is to pay your bills on time. And here’s a tip: If you find it hard to remember the due dates of your bills, or sometimes simply forget to pay them, automate their payments so that the money comes directly out of your bank account every month, ensuring you never miss a bill payment. Another good way to improve your credit score is to stay under your credit limit on your credit cards. This shows mortgage lenders that you can spend responsibly.
- Save for a larger down payment. Your credit score is not the only factor that will affect your chances of getting a mortgage. The more money you can save for your down payment, the less you’ll have to pay in interest costs over the life of your bad credit mortgage. Having a larger down payment also shows lenders that you are in a good position financially to own your own home.
Qualifying for a bad credit mortgage
If you’ve taken steps to improve your credit rating and save for a larger down payment, the next step is to find out if you qualify for a bad credit mortgage. The first thing to do is check your credit score at Equifax or TransUnion. If your score is below 600, you’ll probably qualify for a bad credit mortgage.
The next step is to research your options for a bad credit mortgage by looking into trust companies, “B” Lenders, and Subprime Lenders and mortgage lenders for people with bad credit. Another alternative is to work with a mortgage broker, who can put you in touch with bad credit mortgage lenders. Be prepared to outline steps you’re taking to improve your credit score and respond to any significant red flags in your credit history, such as bankruptcy.
Can I get a reverse mortgage with bad credit?
Yes, it is possible to get a reverse mortgage with lower credit scores. Unlike traditional mortgages, reverse mortgages do not require high credit scores or proof of income. While your credit score is a consideration, the amount of reverse mortgage you are approved for is based on factors such as your age, the appraised value of your home, its location, and your personal debt levels.
Frequently Asked Questions about Bad Credit Mortgages
What is a bad credit mortgage?
A bad credit mortgage is a mortgage given to individuals with bad credit or a bad credit history.
How is bad credit determined?
Bad credit is typically determined by credit scores. In Canada, credit scores range between 300 to 900 and are assigned to individuals by Canada’s two major credit bureaus, Equifax and TransUnion. To qualify for a bad credit mortgage, your credit score will usually have to be below 650, although this can vary by lender.
How does bad credit affect mortgages?
A bad credit score means that individuals are considered riskier to lenders compared to those with a good credit score. To compensate for the risk, lenders will usually charge higher interest rates to people who apply for a mortgage with bad credit.
How can an individual improve their credit score?
There are a number of things you can do to improve your credit score, such as establishing a credit history, paying your bills on time, not having too many credit cards, and staying under your limit on your credit card.
How the CHIP Reverse Mortgage can your boost cash flow
As we have seen, there are factors that can derail our finances and affect our credit scores, such as an unexpected job loss, a disability, or a divorce. If you have equity in your home, but have had credit problems and want to improve your cash flow and finances, one option worth considering is the CHIP Reverse Mortgage from HomeEquity Bank. The CHIP Reverse Mortgage is a safe and secure financial solution that allows Canadians homeowners 55+ to access up to 55% of their home’s value in tax-free cash. The best part is you don’t have to make any regular monthly mortgage payments. You can choose to receive the tax-free funds as a lump sum or in regular monthly deposits, and can use the cash for any of your financial needs, including:
- Paying for unexpected expenses
- Funding your retirement
- Debt consolidation
- Regaining your financial footing after a divorce
- An emergency fund for unforeseen health care costs
You can even use a reverse mortgage to pay off your conventional mortgage instead of renewing or refinancing your mortgage.
Learn more about how a CHIP Reverse Mortgage works and call us toll-free at 1-866-522-2447 to see whether it’s the right solution for your cash-flow needs.