How To Get A Mortgage With Bad Credit

Many Canadians encounter credit issues when life’s hurdles get in the way, whether it’s an illness, a job loss, a global pandemic, or just a lack of credit. It can take some time to get back on track, which could mean putting off the purchase of a home.

Waiting may not work for some, though, who—other than poor credit—may have all their ducks in a row and are ready to take the homeownership plunge.

The good news is there are ways to get a mortgage with bad credit, as well as other options if you’re in that situation. The bad news is they don’t always come cheap. Here are our top tips on how to do it.

If you Apply Today, we will will contact you and go over mortgage financing options available. 

1. Get a co-signer, which costs nothing, but also comes with the risk that if you can’t pay your mortgage, your co-signed will be forced to. Both parties need to qualify for the loan, though. If one is deemed incompetent, the other may take on 100% of the financial responsibilities.

2. Add an insurance policy to protect your equity. Mortgage lenders typically required mortgage default insurance, but there are other options available if you have a poor credit history. Some insurers, such as First National Financial Corp., offer options for people with low scores or no credit history at all. With these policies, premiums are paid monthly.

3. Borrow a little extra. There is often a minimum acceptable credit score, but the premium that an individual has to pay for a mortgage tends to decrease as the amount of money borrowed goes up. This means that someone with a comparatively poor credit rating may get their loan approved more easily if there are additional funds that are borrowed to reduce the risk.

4. Combine a self-employed income with traditional employment income, or vice versa. If you have poor credit but make good money, lenders may be more lenient on your score if they can see another source of income for yourself and/or your spouse. Anyone who wants to apply for loans with bad credit should begin by consulting a mortgage professional. This person can help you decide which options will work best for your situation and give advice on how to improve your score after that, in order to get the lowest interest rates in future.

5. Borrow from friends or family members. It’s an option that many Canadians are already using with success, but without the hassle of screening paperwork. It can be a great solution for people who don’t want to go through the formalities necessary with any other option or can’t qualify for traditional financing because of their credit history. Just make sure you are aware of the risks involved, including the impact on the relationships with those close to you.

6. Rent out a room in your home. If you’ve been unable to qualify for traditional financing, such as through mortgage default insurance, one way to do it is by adding additional income from renting out a room. This is not only cost effective for people with bad credit, it’s the ideal arrangement if the borrower is home-shy or just looking to downsize. Not everyone can afford to do this though. If you are not living in your mortgaged property full time, you will need someone else to act as owner of your house on paper – even if they actually have no involvement – which can make things complicated if you’re trying to buy with someone else.

7. Get a HELOC (Home Equity Line of Credit) or a home equity loan. These can be great options for those who aren’t able to qualify for traditional financing, but would like the convenience of having a mortgage without all the paperwork and hassle that comes with it. You can use your home’s equity as a source of cash, just like you would for any other loan, and repay the monthly instalment whenever you want – not when it’s due. As far as interest rates go, they are likely to be higher than those offered with traditional mortgages though.

8. Use a Guarantor. This is a great option for those who have a strong relationship with someone willing to stand behind them and vouch that they can afford the monthly payments on their loan of choice, i.e., a guarantor. A guarantor does not need to be a relative – it could be someone from work or even your partner’s family member. However, they will need to pass credit checks themselves and be prepared to do so without guarantees of their own.

9. Consider getting a mortgage from a smaller lender or credit union. A Mortgage Brokers Association of BC report says that smaller banks and credit unions are more trusting when it comes to those with bad credit – especially if you’re able to show your client service revenue. That will give them an indication that you are likely to repay the loan on time, which is always key when it comes to banks and lenders. Just bear in mind that lower rates often come with less flexibility, including being unable to divert cash flow into investments or other assets.

10. Build your credit score over time.