If you have time to work on improving your bad credit score before applying for the mortgage, that’s well and good. However, even if you are short on time, you still have options to achieve homeownership despite a poor credit score. Let’s discuss this in-depth below!
Minimum Credit Threshold to Get a Mortgage in Canada
Mortgage lenders see your credit score as a reflection of how reliable you are when it comes to paying back debt. If your score is on the lower side, it can be complicated to get approved for the loan. Plus, you may also face much higher interest rates because of your poor credit.
But what exactly counts as a “poor” or “bad” credit score in Canada?
Well, different lenders have different cut-off points for what they consider a “poor” credit score. According to Equifax, one of Canada’s major credit bureaus, a credit score between 300 and 579 falls into the poor range.
Is It Possible to Qualify for a Mortgage and Buy a House with a Poor Credit Score?
Yes, it is possible to buy your first house in Ontario even if your credit score is less than perfect, in fact, under 579. But here’s the catch: Canada’s Big Six Banks are unlikely to approve your mortgage application if your score is that low. To qualify for a traditional mortgage with the Big Six banks, you generally need a credit score of at least 680.
Instead, in this case, you will have to turn to B-lenders and private lenders in Canada. B-lenders have a minimum credit score of 500 for owner-occupied fixed-rate mortgages. They have a credit score threshold of 600 for owner-occupied variable-rate mortgages. Private lenders are even more lenient; they often approve mortgages regardless of your credit score.
Strategies to Qualify for a Mortgage with a Poor Credit Score
1. Review Your Credit Report Carefully
Your credit report is a detailed snapshot showing your current balances, recent credit inquiries, and any collections or public records. Sometimes, your credit report might contain mistakes, including:
- Incorrect balances
- Payments marked late when you actually paid on time
- Outdated collection accounts
Such inaccuracies can unfairly lower your credit score and make lenders hesitant to approve your mortgage.
Hence, ensure to check every detail in your credit report with a fine-toothed comb. You can get your credit reports for free from the two major Canadian credit bureaus: Equifax and TransUnion. If you spot anything wrong, dispute it immediately with both the credit bureau and the company that reported that information. Fixing these errors can clear up false negatives, often improving your credit score enough to boost your mortgage chances.
2. Make a Larger Down Payment
Another effective way to get a mortgage approval with a low credit score is to increase your down payment. A larger down payment directly impacts your loan-to-value ratio (LTV), which is the percentage of the home’s purchase price that you are borrowing.
For example, if you are buying a $500,000 house and putting down $50,000, you are borrowing 90% of the home’s value. But if you can put down $100,000 instead, your LTV drops to 80%. Lenders prefer these lower LTV ratios because they mean you own more of the home right away and are less likely to default on the loan. With a larger down payment, the lender will also likely overlook your less-than-perfect credit score and approve your mortgage.
3. Think About Using a Co-Signer
If your credit score is holding you back, bringing a co-signer into the picture can be a smart move. A co-signer is typically a family member who agrees to share responsibility for the mortgage with you.
When lenders assess your mortgage application with a co-signer, they look at both your and the co-signer’s financial situation. Thus, a co-signer with solid credit and stable income can offset the risk of your low credit score.
4. Explore Alternative Lending Options
Explore alternative lending sources if none of the above strategies help you qualify for a mortgage. Depending on your situation, you must approach either a B-lender or a private lender. B-lenders include mortgage companies, credit unions, and other financial institutions that operate outside of traditional banks.
These lenders are more flexible and willing to work with borrowers who have a low credit score. However, this flexibility comes with a price. Interest rates tend to be higher, and they usually require a larger down payment to reduce their risk.
Private mortgage lenders in Canada are another option. These lenders are often the last resort for those with poor credit or unusual financial situations. However, they usually charge even higher interest rates and require larger down payments than B lenders.
Source - Nerd Wallet
Key Takeaway - Consider All Factors Before Making the Call
Hopefully, by now, you are clear that having a low credit score doesn't have to stop you from becoming a homeowner. You can secure a mortgage and move into your dream home, even if your credit score isn't perfect. However, before you jump into any option, consider the pros and cons of each choice.
For example, a bad credit mortgage might offer you quicker approval, but it often comes with higher interest rates and stricter terms. On the other hand, having a co-signer means someone else is legally responsible for your loan. This strategy could impact the co-signer’s financial situation and your relationship.
Hence, carefully consider your choices and pick the option that fits your unique situation. The right strategy can get you closer to homeownership, even with a low credit score.