The Well

Stephanie Overholt | Blog,Mortgages

Mortgages For Less Than Perfect Credit

July 26, 2018

Credit scores are a very important factor in qualifying for mortgages in Canada and in determining the rate you’ll get. Finding mortgages for less than perfect credit can also be difficult – but we’ve got the tips and tools you need to make the right decision.

Credit scores commonly range from 300-900 (including the Equifax ERS 2.0 score provided for free from Borrowell). The higher the score, the better. High credit scores indicate to banks, lenders, and mortgage providers that you’re more likely to repay debt. Click To Tweet

Credit score qualification

Someone with average credit may qualify more easily with traditional lenders (including the major banks), get access to lower rates, and could qualify for a mortgage with a down payment as low as 5% of the property value. Access to down payments as low as 5% can start with credit scores of 600, but options increase and rates decrease as you get closer to good or excellent credit of 650-700+.

Check your free credit score with Borrowell to see the best mortgage providers available to you. It only takes 3 minutes and won’t hurt your credit score!

Other qualification factors

Of course, credit score isn’t the only factor lenders consider in qualifying you for a mortgage.

Income is another important factor when it comes to finding mortgages for less than perfect credit. There are two elements of income that lenders consider – income stability (ideally you’d have two or more years of continuous employment) and provable income (i.e. you can provide pay stubs, employment letters, and tax documents).  

Lenders will also consider your current debt repayments and your expected mortgage payment to determine if you can afford the size of the mortgage you’re requesting. If you’ve had a previous bankruptcy or consumer proposal, it helps if they’ve been discharged for at least two years.

Pro tip: consider a co-applicant or a co-signer as an option if you’re having trouble qualifying on your own.

Requirements for mortgages for less than perfect credit scores

If you have a below average credit score or other items that may make it difficult to qualify with traditional lenders, you’ll likely need at least 20%-25% down payment.

If you’re refinancing an existing property, you’ll need at least 20% equity in your home (i.e. you can’t owe more than 80% of the value of your home). If you’re buying outside of a large urban centre like the GTA or GVA, the minimum down payment required may be even higher.  

Because mortgage qualification for individuals with below-average credit is more focused on the property than on your ability to repay, a full property appraisal is typically needed.  

Lender options

Alternative lenders like trust companies and some financial institutions will often offer mortgages for scenarios where traditional lenders like the major banks won’t lend. Alternative lenders may be more flexible considering factors above such as below-average credit scores and non-provable income. If you don’t qualify with an alternative lender, there are many providers of private mortgages for less than perfect credit in Canada.

However, the rates with alternative lenders are typically higher than for traditional lenders and private lenders charge even higher rates. Because of this, shorter terms (the length of the mortgage) are often best. As your financial health improves, you should eventually be able to qualify at an institution with a lower rate. At that time, your mortgage provider can help you refinance your mortgage into that lower rate.  

On top of the higher rates charged by alternative and private lenders, there are typically additional fees charged to arrange these mortgages. Because of this, it can often make sense to hold off buying a home until your financial health improves by improving your credit score or saving a larger down payment.

Mortgage brokers

The great thing about mortgage brokers is that they have access to a wide variety of lenders including traditional, alternative, and private. If you’re not sure what type of lender you’ll qualify for, we recommend working with a mortgage broker who can find the best lender for you.

Start by getting your free credit score with Borrowell and then check out our trusted mortgage providers recommended for you.

The bottom line: improve your credit health before you buy

With a credit score below 600, you may qualify for a mortgage, but increases to your credit score may unlock lower rates. If you plan to buy a house or renegotiate your mortgage in near future, it makes sense to check your score and report with Borrowell then make changes to improve your credit health before you buy a home.

Check your free credit score with Borrowell to see the best mortgage providers available to you. It only takes 3 minutes and won’t hurt your credit score!

Stephanie Overholt is Borrowell’s in-house mortgage expert. Follow her on LinkedIn

shares