Getting a mortgage with bad credit in Canada doesn’t have to be impossible. If you’re looking for mortgage answers, with a less than perfect credit score, we have you covered.
We’ll go over everything you need to know about how to get a mortgage with no down payment and bad credit in Canada. From paying off your debt to weighing down payment options, we’ve rounded up ways to boost your credit score and have included tips for making sure you’re in a mortgage you can afford.
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1. Minimum Credit Score for Mortgage Canada: The Importance of Checking Your Score
Getting a mortgage no matter what your finances look like, should always start with checking your credit. Your credit score plays a big factor in getting a loan. This number tells lenders how credit-worthy you are.
The higher your score, the better your loan terms will be. This doesn’t mean that if you have a low credit score, all is lost, however. There are ways to improve your score so that lenders will be more inclined to work with you.
Before you apply for a mortgage, check your score on your own. This will allow you some time to do a little credit repair. To check your score for free, there are a number of options available to you. We recommend using Insurdinary's platform to do this.
TransUnion Canada allows you to order one free credit report a month for free. Ordering your own credit report won’t affect your score or count as a credit pull.
Once you’ve seen your score, it’s time to go to work. Set a plan in motion to get your score up quickly. One of the easiest ways is to check your credit for disputes.
If something is wrong with your report, call the company to have it removed. If you can tackle a few of these, you should see your score bump up.
2. Understanding the 600 Credit Score Canada: What Getting a Mortgage With Bad Credit Means
To get a mortgage in Canada from a traditional bank, your credit score needs to be between 600 and 680 according to new regulations.
To understand what your credit score does to your loan terms, you’ll want to play around with different interest rates. Let’s say you get a mortgage for a $500,000 home with 5% down. If your interest rate is 2.54%, your monthly mortgage payment is $2,223.
If your interest rate is 10-18%, your monthly payment could be $4,419 a month. That’s double your monthly payment on interest alone. Think about all you could do with the money you’re saving on interest.
The good news, however, is that after five years you can always renew your terms and your loan payment could significantly lower if your credit improves. You’ll also be building a good credit history making your mortgage payments on time and building equity and net worth.
3. Pay Bills On Time
When you’re repairing your credit, one of the best things to do is to pay your bills on time. Paying your bills on time will increase your credit and show lenders a positive credit history.
When you’re trying to work on your credit, this is a huge step. Missing payments will only further drop your score. Traditional banks will often scrutinize each missed payment as you go through the home loan process.
4. Pay Off Debt
The most effective way to increase your credit score is by paying off your debt. If this statement scares you, take a deep breath. Paying off your debt doesn’t have to be done in one day.
With a lower credit score, it’s understandable that saving money and paying off debt is difficult. Chip away at your debt a little at a time. Remember that something is always better than nothing.
One key takeaway is to start with your low hanging fruit. Let’s say you have $10,000 on one card and $2,000 on another. Keep making payments on both but focus on the card with the smaller balance.
If paying extra on your credit cards is difficult, make it automatic. Go online and set up automatic payments to your credit card from your chequing account. Bump up the payments for more than just your minimum payment.
5. Don’t Use All Your Available Credit
One of the best things you can do for your credit score is to not use all your available credit. Your available credit is your credit limit on your card. Let’s say you have a $20,000 credit limit and your bill is $800.
You have a low credit utilization ratio. This will boost your score and keep your interest rate lower. To help do this, take a look at all the credit you currently have. Record the balances, the minimum payments, and estimate how long it would take you to pay these down. From here, you can make a plan to start paying these off.
Once your credit cards are paid off, keep them open. This shows you have a lot of available credit, but you aren’t using it or are paying it off each month.
6. Don’t Open New Credit
When you’re going through the mortgage process, you don’t want to open new credit. New credit lines and inquires will lower your score.
This goes for things such as store credit cards, car loans, and anything you’d run a credit check for. Be careful not to apply to too many mortgage companies either. Doing so will lower your score.
7. Keep Your Old Accounts Open
One factor that plays into your credit score is your credit history. The longer you’ve had credit, the better history you have. This shows lenders that you have a long record of paying your bills on time.
Just because you’re young or are a first-time homebuyer, doesn’t mean you won’t qualify for credit. Keep in mind that if you pay off a card or have an old credit card you don’t use anymore, keep it open and on your credit history.
For young buyers, the good news is that your score will go up, the older you are. Keep making your payments on time and keep your credit in good standing.
8. Track Your Finances
In order to pay off cards and make extra payments, you’re going to need to track your finances. As wonderful as it sounds to pay extra money off your credit card each month, it has to come from somewhere.
To get a better handle on all the money you have coming in and out, you need a spreadsheet. Here, you can track your income as well as all your expenses. Make a note of what is a fixed expense and what isn’t.
A fixed expense is your car payment, for example. A music streaming service isn’t a fixed expense. When you see what all your fixed expenses are, you’ll be able to see what is left.
The number you have leftover is where you’re going to get the most accomplished. If there isn’t anything left, it’s time to make some cuts.
9. Making Cuts
Thinking about budget cuts is never anyone’s idea of a good time. It is, however, necessary to get your credit back on track. In order to qualify for a mortgage with a low credit score, you’re going to have to put in a little work.
Take a look at the expenses you have that aren’t fixed. The music streaming services and gym memberships aren’t things you need if money is tight. You’ll be surprised at how many things you’re paying for that you aren’t using.
If you aren’t going to that group fitness class and you didn’t even know you had a movie service, those expenses should go. This money is better spent on paying off your debt and saving for a down payment.
10. Boost Your Savings
Saving is a critical part of getting a mortgage. The more you save, the more money you’ll have for a down payment, home repairs, and moving expenses. You’ll never regret adding more money to your savings account.
Once you’ve assessed your finances, it’s time to make a saving plan. Budget your money towards paying off your debt, and funnel more into a savings account.
When you have a low credit score, a higher down payment could save you money on mortgage and interest payments. Think about our example of a $500,000 home. With a $50,000 down payment, your mortgage lowers to $450,000.
The larger your down payment, the less you’re financing and the less interest you’ll pay. Don’t stress that you can’t buy a home without saving 20% for a down payment, however.
For many homebuyers, paying off your debt could be more cost-effective than putting a huge down payment down. Weigh your options and see which route is best for you.
11. Find a Co-Signer or Roommate
If you’re struggling to get approved for a mortgage on your own, consider a co-signer or a roommate. With a co-signer, you’ll be qualifying for a mortgage based on both of your credit scores.
If your co-borrower has a high score, you could benefit from using theirs as well. You’ll see more favourable loan terms and a lower interest rate.
With a roommate, you both can qualify for the mortgage together if you choose. There are some risks involved with this but with someone you trust it could be beneficial.
If you don't feel comfortable signing a mortgage together, you could use their rent as a way to offset your costs. This would be like an additional income that you could use to pay off debt, pay the mortgage, and boost your credit score.
12. Focus on Better Terms in the Future
If you get into a higher-interest mortgage. Understand that it isn’t forever. After a five-year period, you can reevaluate your terms and your financial situation. If you’ve put in the work to lower your score, you’ll see a much better interest rate.
Over a longer period of time, you’ll have more of your house paid off as well. Homes also increase in value over time providing you with more equity. Even after you close on your home, don’t stop repairing your credit for the future.
13. Find a Mortgage Company That Works for You
With a low credit score, you don’t have to settle for less. We will show you a side-by-side comparison of several mortgage options. You will see competitive rates and options for low credit scores and little to no down payment.
No matter what your credit score, you want a mortgage company that fits your unique needs and financial situation. Mortgages aren’t a one-size-fits-all product.
How to Get a Mortgage with Bad Credit in Canada
Knowing how to get a mortgage with bad credit in Canada is essential to buying your new home. Whether you’re a seasoned homeowner or a first-time homebuyer, your credit score doesn’t have to hold you back from your dream of owning a home.
To kick-start your mortgage application, fill out the contact form here to get started. You’ll be one step closer to owning a home with a mortgage you can feel good about.