Expertise

Introduction

Taking out a mortgage with bad credit can sometimes seem like a journey full of obstacles. Financing organizations can indeed be reluctant to grant loans to applicants with a problematic credit history. At Xperto, we believe that not all doors are closed. A better understanding of the options available to you and the steps to take is essential to overcome this hurdle. Discover our advice for finding financing solutions adapted to your situation, even with bad credit.

What is a bad credit score?

Like you, all borrowers and loan applicants have a credit score in Canada. This indicator is a numerical score that reflects your debt repayment history.

The credit score is calculated based on numerous factors such as:

    • the history of your payments via credit cards or your consumer loans
    • the total amount of your debts relative to your remuneration or the duration of your credit history.

Your credit score is a number that generally varies between 300 and 900. The higher this indicator obtains a value, the more you are considered a reliable borrower.

If you have a credit score evaluated between 750 and 900, you then have easy access to mortgages with the best rates.

If this indicator is between 700-749, lending organizations consider you as reliable and offer you good credit conditions.

You can obtain a loan, but with less interesting conditions, when your score is between 650-699

You may be considered a risky borrower if your credit score is between 300 and 649.

Why does your credit impact obtaining a mortgage?

Banks that grant mortgages systematically seek to minimize the risks of payment default before giving favorable approval regarding a loan application. These institutions want to ensure that the borrower is able to repay their mortgage over time.

To conduct this evaluation, lenders rely partly on the study of the credit score. This indicator allows them to quickly and objectively evaluate the applicant’s behavior regarding debt repayment. They consider borrowers with a bad credit score as more likely to not repay their loans. They thus become more reluctant to grant a mortgage to these candidates with high non-payment risk.

Some lenders may nevertheless accept mortgage subscription applications from applicants with bad credit, but under certain conditions. The probability of signing a contract with an interest rate higher than those practiced in the market is higher for this category of borrowers.

In addition to higher interest rates, bad credit can also lead to less interesting loan conditions, such as a shorter loan term, higher fees or the requirement of a larger down payment. Borrowers with bad credit thus have fewer choices for their mortgage application, as many financial institutions are less inclined to grant them credit.

What are the available options for borrowers with bad credit?

Mortgage applicants with a credit score pointed out by banks have several options to contract a mortgage. Each solution can present advantages and disadvantages:

    • Taking out a traditional mortgage with bad credit:

It can be difficult to obtain a mortgage from a traditional bank with bad credit, but this project is not impossible. These institutions analyze several factors, including your credit score, your income, your debt ratio and the stability of your employment. If your credit score is below 600, traditional institutions are less motivated to grant you a loan, but other lenders may have more flexible eligibility conditions.

To increase your chances of approval, you can consider increasing the amount of your down payment, ideally 20% or more. A higher personal contribution demonstrates that your financial situation is improving and that you present less risk of payment default.

    • Choosing a secured mortgage:

A secured mortgage is a loan that is secured by an asset, such as real estate. Several solutions allow you to secure a mortgage, such as:

    • presenting a down payment exceeding 20%: this approach can be considered as a form of guarantee, as it reduces the loan amount and the level of risk for the lender;
    • using the equity of an existing property to secure a new loan. This option is particularly common in the context of refinancing.
    • Opting for a high-rate credit for risky borrowers:

If you cannot get positive feedback from a traditional bank for your mortgage application, you can turn to an alternative lender or a private lender. These organizations are more predisposed to approve your application even if your credit score is low, as they primarily serve borrowers considered risky.

The contracts they offer are generally accompanied by higher interest rates, which can be on average around 12%. These lenders may also require a larger amount for the down payment and they usually offer a mortgage with a shorter duration, often extending up to 2 years. These loans are a short-term solution to obtain financing while you work to improve your financial situation.

    • Signing a mortgage with a co-borrower:

Adding a cosigner to your mortgage application can also increase your chances of approval. Your co-borrower shares the loan responsibility with you. It can be a parent, family member or friend. If your co-borrower has a good credit score and stable income, they can compensate for your bad credit and make your application more attractive to lenders.

How to improve your chances of getting a mortgage with bad credit?

Several avenues also allow you to raise your score in case of bad credit and take out a mortgage. With this in mind, your strategy should notably focus on:

    • various actions leading to improving your credit score

Before implementing your resolutions, it is essential to know precisely your credit score from official authorities like Equifax and Transunion. This free process does not affect your credit score. By examining your file, you can then identify the elements that have a negative impact on your score and work to improve them.

Once you know your credit score, get used to properly settling your debts. Settling your bills on time is crucial for improving your credit rating or score. Each delay can still affect this indicator. The ideal is for example to schedule automatic payments of your debts or to settle your bills upon receipt.

Also try to reduce your debts and refrain from using the entire authorized balance on your credit cards. If you use several, consider consolidating your debts on a single card with a lower interest rate or a line of credit. Each of your loan applications is also recorded in your file and can lower your credit score. You are thus advised to limit your loan subscriptions, as they can indicate to lenders that you have an urgent need for money. Only ask for the credits you really need.

    • an increase in your personal contribution

If you have the possibility to pay a down payment of at least 20% of the property price, some lenders may be more lenient towards your low score. A larger contribution reduces the risk for the lending institution, as it lends you less money. When you can produce a larger down payment, you also demonstrate to the lender your ability to save, showing your financial stability.

What are the steps to obtain a mortgage with bad credit?

Whether from a traditional bank or through an alternative lender, important steps should not be neglected when applying for a mortgage with bad credit:

    • be realistic about the contract conditions that lenders may offer you. Due to your bad credit, it is likely that you will be forced to accept higher interest rates, producing a larger down payment and less flexible repayment conditions;
    • when you have identified some potential lenders, also take care to compare the different proposals you receive. Interest rates, fees, repayment conditions and down payment requirements can vary considerably from one lender to another. Take the time to carefully read each contract and ask all necessary questions to understand the implications of each financing solution;
    • if you obtain a mortgage with bad credit, it is also essential to work permanently to improve your credit score. By respecting your resolutions concerning the good management of your finances, you can improve your financial situation in the long term and obtain better financing conditions during your future borrowings.

How to maximize your chances of obtaining a mortgage with bad credit?

To convince lenders despite bad credit, it is crucial for a borrower to demonstrate their financial stability. Despite a low credit score, show that you are able to manage your finances responsibly. The stability of your professional career as well as access to regular income are important factors that can help you in this regard. Provide evidence of stable income, such as bank statements or pay stubs.

The presentation of a solid file is also a major sign that can help you in your mortgage application with bad credit. For example, gather all necessary documents that can attest to your ability to repay credits. A history of regular payments of your debts is for example a positive point. Make sure to pay your bills on time and repay your debts to show lenders that you are able to meet your financial obligations. If you have debts, it is wise to show that you have a plan to manage or reduce them.

Conclusion

Several options can therefore be considered to obtain a mortgage with bad credit. To improve your situation and maximize the chances for your project, start by checking your credit file and understanding the factors that can affect your score. Turn to private lenders if traditional financing organizations do not give you positive feedback. Carefully compare their offers and do not hesitate to negotiate and ask for clarifications for each element. Consult an Xperto mortgage broker to accompany you through these steps and to optimize your chances of approval. Your professional can guide you through the process, help you choose the option best suited to your situation and provide you with personalized advice to improve your bad credit.