If you’re looking to buy a home, the current real estate environment can be very daunting.Between the pandemic, rising inflation, and the housing crisis, becoming a homeowner seemsmore unattainable than ever. In this article, you will find an overview of…
- Your credit score is a measure of your ability to pay your bills on time, and is reported to two major credit bureaus in Canada: Equifax, and TransUnion.
- Credit scores range between 300-850. In Canada, a score of 650 or more will help you get approved for mortgages.
- Your credit rating affects your ability to get access to better rates and more favorable terms on mortgages and other credit products.
- It is possible to get a mortgage with bad credit in Canada, either by improving your credit, or applying for a mortgage with a private lender, or B lender. You may have to pay higher interest rates, or save up for a larger down payment with bad credit.
What is a Credit Score?
A credit score tells lenders how responsible you are with paying back money you’ve borrowed, and how good you are at paying your bills on time. Lending inherently carries some risk, so credit scores are used to help lenders make an informed decision about the likelihood you’ll pay back what you owe, on time and in full. In Canada, there are two companies that track your credit scores and reports: TransUnion and Equifax. Whenever you borrow money like a loan, line of credit, mortgage, or credit card, a record of your payment behavior is kept. This is one of the main factors behind your credit score, along with how much of your total available credit you’re using, different kinds of credit you have, and how often you’ve applied for new credit. Ultimately, this score determines how likely it is that you’ll be approved for other lending products, particularly mortgages, and has a major influence on the kind of rates you may be able to secure.
Credit Score Ranges in Canada
Credit scores range between 300 and 850, with those ranging between 650 to 725 considered average in Canada. Keep in mind that Equifax and TransUnion have slightly different reporting criteria, and that often, major lenders like banks and credit unions will look at your Equifax score to determine your eligibility. Typically, Equifax credit scores come in slightly lower than TransUnion’s, hence their perceived reliability, given that it’s harder to get a high score through Equifax’s reporting protocol.
Credit Score Ranges in Canada|
|Very Poor||Poor||Fair||Good||Very Good|
|Approval chances for A lenders||Very low||Low||Okay||Fairly high||High|
|Mortgage lenders available||Private lenders||B Lenders and Private Lenders||A and B Lenders||A Lenders||A Lenders|
Who Qualifies for Bad Credit Mortgages?
You may qualify for a bad credit mortgage if your credit score is below 600, and you have a down payment or home equity of 20% or more. If you have a credit score lower than 600, and you do not have at least 20% as a down payment, you will likely not be approved for a bad credit mortgage. If you have both a good credit score and 20% or more as a downpayment, consider better options, like B and A lender mortgages.
Will I Qualify for a Bad Credit Mortgage in Canada?|
|Credit Score 600+||Credit Score
Less than 600
|Down payment 20% or more||✔||✔|
|Down payment Less than 20%||✗||✗|
Your Credit Report and Credit History
Your credit report will include your credit score, but it gives people more detail and context around this score as well. A credit report includes information about your payment history, how much debt you currently owe, your credit limit, and the age of your accounts. In addition, your credit report shows what kind of debt you have, plus any missed payments, past-due collections, and bankruptcies.
Your credit report is used by many different institutions, not just lenders. Whether you’re applying to rent a new apartment, going through background checks for a new employer, or even signing up for a cell phone plan, your credit report can be pulled and used as an indicator of your financial responsibility.
In particular, lenders and other stakeholders will look at your credit report to look for any red flags – signs that you have missed payments, abandoned debt completely, or times you have tried to apply for loans and not been approved.
In the case of mortgages, which run upwards of hundreds of thousands of dollars, your credit report and credit history is an invaluable tool. It allows lenders to look at an objective record of how you’ve behaved with your money – particularly that which others have lent you.
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How to Check Your Credit Score
Both Equifax Canada and TransUnion allow you to check your credit scores online. While Equifax allows you to receive free credit reports by signing up for an account, TransUnion currently charge $24.95 a month (plus tax) to get a copy of your credit report. However, once you’re signed up you can refresh your score and report for free. Many banks will let you check your credit score using online banking or in their app, like CIBC for example. Other providers, like Capital One, include free credit score tools in their app as well. Finally, a number of third party sites exist, like Borrowell, that will let you track your credit score and look at your credit report for free.
Lenders differ in which credit bureau they use to assess your score and credit history. While some lenders exclusively use Equifax, others use TransUnion, and some both. According to Loans Canada, CIBC, TD, HSBC, Desjardins, and Meridian Credit Union only use Equifax. Conversely, RBC, Laurentian Bank, and Vancity use TransUnion only. Many other lenders use both bureaus, like BMO, Scotiabank, National Bank, and Tangerine.
How to Improve Your Credit Score
While it’s not an exact science, there are a number of factors that affect your credit score. These include things like:
- Your payment history. This is perhaps the number one influencing factor on your credit score. Making payments on time is considered critical in helping to improve your credit score.
- Your credit utilization i.e., how much % of your total available credit are you using each month. Most sources recommend 30% utilization as an optimum.
- The age of your oldest account on file. A longer credit history generally positively affects your credit, as long as other factors are in good shape too.
- Having different kinds of credit available. Showing that you can manage a diverse range of products, from credit cards to lines of credit, shows that you are more responsible as a borrower and can improve your credit score.
- The number of hard enquiries on your file. A soft inquiry does not affect your credit score, and is generally used by an individual or company to check your credit score for simpler reference purposes. Hard enquiries, however, are used by lenders when you’re applying for a loan, e.g. for a vehicle or a mortgage. Hard enquiries generally impact your credit score, and can be a negative signal if they appear multiple times in a short period of time.
- Your total credit available. Having more credit available is generally beneficial for your score (assuming everything else is fine) as it shows you have been trusted with higher amounts of money by other lenders.
- Length of time between new account openings. This has a minor impact on your score, but it can affect it. If you’ve opened several accounts in the last year, it could signal to some lenders that you are having financial trouble and need the money. However, this is factored far less than other aspects, like your payment history.
Companies Canadians Use to Monitor & Improve Credit Scores
There are several free credit score providers for Canadians to use. Each uses a specific bureau to pull your credit information from, and they come with different reporting frequencies.
|Free Credit Score Provider||How Often Can You Check?||Credit Bureau Used|
|Capital One*Must have at least one Capital One product active||Any time||TransUnion|
How Your Credit Score Impacts Your Mortgage
The higher your credit score, the more likely it is that you’ll be approved for a mortgage – assuming all other areas of your finances are in good standing, like your income, and debt service ratios. Generally, the best mortgage rates are available to anyone who meets the lender’s eligibility guidelines and has a credit score over 680. The minimum credit score to buy a house in Canada is 650. While some applicants in the 600-680 range may be approved, it may be upon the basis of other conditions, like higher rates, or a larger down payment.
For scores below 600, your mortgage may not be approved with an A lender, or prime lender, as they are also known. These include major banks and lenders like nesto. You may be approved for a loan from a B lender, or other alternative mortgage lender, even if you have bad credit, but expect to pay higher interest rates. You may qualify for a mortgage interest rate that is at least 2% higher than conventional lenders if you have bad credit. There are also private lenders who will charge much higher rates, often upwards of 10%, to applicants with a poor credit history.
How to Get a Mortgage With Bad Credit in Canada
It’s possible to get a mortgage with bad credit in Canada, but your approval likelihood depends on the kind of lender you go with. On top of this, you may have to take a few extra steps, like providing a higher down payment, paying higher rates, or buying mortgage insurance.
Bad Credit Mortgages with A Lenders
Most A Lenders won’t approve mortgages for applicants with bad credit. Your credit score and credit history are one of the main indicators of your financial responsibility. As such, having bad credit will make you seem like more of a risk to A lenders, for conventional mortgages and other loans, lines of credit, and credit cards. If you have bad credit and are looking to get a mortgage, it’s possible to improve your score in less time than you think. Making your payments on time, keeping your credit utilization low, and not trying to open new credit products until your score is better are all good places to start. However, if you have bankruptcies, past-due collections, or other red flags on your credit report, you may want to consider working with a credit counsellor to work your way back to better credit.
Bad Credit Mortgages with B Lenders
If you have bad credit and are still looking to get a mortgage, you may be able to get approved for one from a B lender. B lenders have slightly different, often less stringent approval criteria for mortgages than A lenders, but often charge higher rates and require higher down payments (at least 20% for uninsured mortgages). Examples of B lenders in Canada include:
- First National
- Merix Financial
- Radius Financial
- Home Trust
Rent-to-own home lets potential homeowners rent their home until they are able to save up enough for a down payment. With rent-to-own, homeowners pay a percentage of their rent towards their future down-payment, known as rent credits. This allows them to save up money until they can afford a mortgage.
For example, if you pay $1500 in rent every month for three years, and 20% of that accrues as rent credits, you would have, you would have $10,800 to put down as a payment towards the purchase of the home. In rent-to-own, your rent is often slightly higher than the going rate in the area, as it factors in payment towards the rent credit you will receive.
Rent-to-own has some risks, including the possibility that you will lose some or all of your rent credits if you choose not to buy the property you are renting at a later date, usually pre-arranged on your agreement with the current owner. Ultimately, rent-to-own can provide an alternative to home ownership for those with bad credit.
Frequently Asked Questions
How long will a bankruptcy stay on my credit report in Canada?
According to the Government of Canada, both Equifax and TransUnion remove bankruptcies from your credit report after 6 years from the date you’re discharged. For TransUnion, that number is 7 years in some provinces. If you declare bankruptcy more than once, the bankruptcies appear in your credit report for 14 years.
Is my credit score impacted by missed or late payments?
Yes. If you miss a payment, it will affect your credit score. A payment that is more than 30 days past due can lower your credit score by as much as 100 points.
What if I can’t fix my credit score?
Checking your credit report for errors, and adhering to good credit practices will eventually improve your score. However, if you are struggling to improve your score, it may be worth speaking to a credit counsellor to discuss your situation and make a plan to improve your credit.
Can I get a mortgage with no Canadian credit history?
Some Canadian lenders will allow newcomers to Canada, or others with little or no credit history, to be eligible for a mortgage through special programs. Major banks like TD, CIBC, BMO and RBC all have mortgage programs for new immigrants who have been in Canada for five years or less. Some lenders will also let you use credit history from another country if you have no Canadian credit history yet.
What if my partner has bad credit and I don’t?
If your partner has bad credit and you do not, it may be worthwhile to not include them as a co-signer on your mortgage. If you have solid credit and steady income, you will likely qualify for something better than a bad credit mortgage, if you apply on your own. A joint mortgage application will include both your partners income and credit information. After factoring in their income, is up to your lender to determine whether your partner’s credit score is detrimental to your mortgage application.
Contrary to popular belief, it’s possible to get a mortgage with bad credit in Canada. Depending on where your credit score lies, and other elements of your credit report, you may even qualify for a loan from B, or even A lenders with less than favorable credit. As long as your credit score is over 650, and your finances are otherwise in order, you may be approved for a conventional mortgage or B lender mortgage in Canada. If you have bad credit (i.e below 650), there are other ways to get a mortgage, for example, through private lenders, rent-to-own schemes, or by saving up a larger down payment to offset your risk. There are also many ways to improve your credit and push your application over the line for approval later on.
Ultimately, if you have any questions regarding your mortgage goals, get in touch with nesto now to be paired with a trained advisor.
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