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Can you get a mortgage with bad credit? Yes, but there are some things to know before you apply or call your broker.
Bad credit and a bad credit history happen for a number of reasons: You lost a job, you forgot (or were unable) to pay your bills, you’re new to a country. We’ve been warned about what can happen because of bad credit—you won’t qualify for the best interest rates for mortgages or other types of loans, and, as a result, end up paying more to borrow; and, in some cases, you may not qualify for a mortgage at all. Don’t be discouraged. Even if your credit history and credit score aren’t the best right now, you can still qualify for a mortgage. If you have bad credit, your mortgage contract may come with more terms and more paperwork. But know that bad credit isn’t forever. And, for that matter, neither is a mortgage.
Your credit score is calculated based on the length of your credit history, your payment history and the amount of debt that you’re carrying. It is represented with a number between 300 and 900. The higher the number, the better your credit score, meaning you may be offered a lower interest rate on loans and credit cards. The general breakdown of credit score looks like this:
| Category | Range |
|---|---|
| Poor | 300 to 659 |
| Good | 660 to 724 |
| Very Good | 725 to 759 |
| Excellent | 760 to 900 |
When it comes to your credit history, the longer you’ve had a record of paying off debt, the better. But aim for at least a year of good credit payment history before you apply for a mortgage. You can check your credit score and history at Equifax, TransUnion and Borrowell for free. (Read for how applying for a credit card affects your credit score.)
There’s always risk involved when money is lent, and companies want assurance that the money will be paid back. All types of lenders, including those that offer mortgages, look at credit scores as an indicator of whether they should lend out money. (Have you considered the mortgage stress test?)
It depends on the lender, actually, says Sean Cooper, mortgage broker and author of the book Burn Your Mortgage. “If you want the most competitive mortgage rates and best options, you should aim for a credit score of at least 680.” If your score is lower, you could still get a mortgage with a bad credit rating. But your mortgage may come at a high interest rate and additional fees, which we’ll cover below.
Watch: MoneySense – Does debt impact your mortgage application
Cooper says some lenders will work with clients who have a credit score of less than 680, as long as certain criteria are met, like having a 20% down payment. “Some lenders are OK with a credit score of 620 or 640,” he says. “If you’re taking an ‘insured mortgage,’ which is [required when you purchase a home with] less than 20% down, then lenders seem to be OK with a lower credit score.”
In this situation, the mortgage will be fully insured by the Canadian Mortgage and Housing Corporation (CMHC), Canada Guaranty Mortgage Insurance Company or Sagen. This costs from 2.8% to 4% of the total mortgage amount, and will be added to your mortgage principal. (Find out what happens if you don’t have enough of a down payment.)
If your score is in the 500 to 600 range, consider a private or alternative lender. These are outside the traditional mortgage providers like the big banks or credit unions.
Cooper does caution that many of these types of lenders ask for a down payment of 20% to ensure that the mortgage is insured. He also says that a borrower could expect to get a higher insurance rate, ranging from 3% to 12%, depending on the applicant’s financial history.
Be warned of additional fees, too. “For somebody who has an excellent credit score of at least 680, there will be fees,” says Cooper. “But when it comes to somebody that’s going to a private or alternative lender with not-so-great credit, there’s almost, but not always, a lender fee which can be added on top of the mortgage balance.” The lender fee typically costs 1% to 2% of the mortgage amount.
Having the support of a co-signer or guarantor can help you get a mortgage with a poor credit history, as lenders see this as a way to reduce the risk of a mortgage default.
A co-signer signs all the mortgage documents and their name appears on title with the purchaser. They co-own the home with the person living in it and they are liable for the mortgage payments, even if the purchaser is the one making mortgage payments. In other words, if the person living in the home can’t make payments, the co-signer will be held responsible for them.
A guarantor, as the name implies, guarantees that the mortgage payments will be made and becomes responsible for the payments the mortgage is unpaid. However, they will not own the property and their name doesn’t appear on the title.
Yes, but you have to put in the work to show that you’re making attempts to improve your credit score before you refinance. Speaking of which…
Getting a mortgage is a big decision. While you want to process to be perfect, sometimes your credit score can get in the way. Know that credit scores are fixable and that you can shop around for the best mortgage for your needs.
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Being a guarantor or co-signing a mortgage is a risky endeavor in the best of times, let alone for someone who has terrible credit.
Wouldn’t it make more sense to loan the money for the down payment in the form of a secondary mortgage?
First-time home buyer. Looking for an investor to invest. I do have substantial savings but not up to 20% yet. Excellent credit score. Where do I find an ivestor
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
To answer Mike’s question, a second mortgage cannot be put in place until a first mortgage is in place. The down payment is your own stake in the game which the lender looks at favorably. A mortgage whether first or second is money borrowed not saved. The problem is that people with poor credit usually have not been able to save any money for a down payment. The only other way is to receive a gift of money which is used for all or part of the down payment, but it must be from an immediate relative such as parent or grandparent or sibling.