1.What is a bad credit mortgage in Canada?
A bad credit mortgage is exactly what it sounds like – a mortgage for people with less than ideal credit scores. In Canada, a bad credit mortgage is usually required when your credit score is less than 650.
A high credit score suggests a good track record of taking care of one’s financial obligations and a bad credit score is the opposite. People with lower scores are viewed as “higher risk” when it comes to mortgage default. Therefore, it’s more difficult to qualify for a mortgage with bad credit.
We, here at Effortless, know that life is full of surprises. Many things can lead to compromised credit – missed phone bills due to busy schedules, unexpected job loss, breakups, mishaps in business and investments. The list goes on.
Often times, a lower score is not entirely within your control. So why let a “score” deny your opportunity to own a home? This is when a bad credit mortgage comes handy.
2.How to qualify for a mortgage with bad credit?
For a regular mortgage, there are three key factors mortgage lenders care about the most: Income, Credit Score, and the Property. When a borrower has bad credit, a mortgage lender needs to use other factors to compensate the increased risk. Therefore, for clients with low scores, lenders usually put more weight on the quality of the property and the future outlook of the borrower’s financial situation. Let’s break this down:
Sufficient Home Equity or Down Payment
To compensate for lower score, a bad credit mortgage usually requires you to have at least 15% of the Home Equity or Down Payment.
- If you own your home, home equity equals to the Property Value minus the Existing Mortgage on the property. For example, if your property is worth $400,000 and you have an existing mortgage of $250,000, your home equity is $150,000. In this example, if you have poor credit, you likely won’t be able to borrow more money from the banks. However, with a poor credit mortgage, you will be able to borrow up to 85% of your home value. It means you can increase your mortgage amount to $340,000, i.e. $90,000 additional funds at your discretion.
- If you are looking to purchase a home, home equity refers to how much down payment you have. Down payment has to come from your own savings or a gift from a family member. Down payment cannot be borrowed funds. To buy a home with bad credit, you need a minimum of 15% down payment. It means, in order to purchase a $400,000 you need approximately $60,000 down payment.
Good Property Location and Condition
The quality of the property becomes very important when someone has bad credit. Lenders rely heavily on the property as a security for the mortgage. Therefore, they prefer properties that are easy to sell in case of default. Here are a few examples that impacts whether a property is easy to sell:
- Urban/ Suburban areas vs. Rural areas
- Good interior conditions vs. messy and/ or unkept interior
- Standard homes vs. irregular structures (2 properties on 1 lot, mobile homes, etc.)
- Markets with price appreciation vs. price depreciation
You will need to order an appraisal report to estimate the “fair market value” of the home. Lenders will then determine the % of mortgage they can qualify you for based on the appraised home value (not the purchase price). This is called the Loan-to-Value ratio (LTV). The max LTV for a bad credit mortgage is 85%.
Have A Plan
Many situations can lead to bad credit. What’s important is to have a way out of your current predicament. In order to have a better chance to get approved, you should have a plan to improve your financial situation.
The plan has to be plausible and make “common sense”. Here are a few examples of “exit strategy”:
- Renovate the property and sell at a premium in near-term
- Bridge financing when your existing home takes longer to sell
- Recover from a separation
- Lost your job and requires temporary funds between jobs
- Supplement your business or investment needs
- Self-employed and unable to qualify with the banks
- New-to-Canada who has abundant equity but no Canadian income
- Rebuilding your credit by consolidating debt
Bad credit mortgages have higher interest rates, so it’s not a long-term solution. Most borrowers stay in these mortgages for 1 to 2 years. After their situation has improved, they refinance back to the banks at a lower interest rate.
3. Who are the bad credit mortgage lenders in Canada?
There are three different types of bad credit lenders.
Banks: The minimum credit scores the banks will consider is between ~650-680. However, the banks do make exceptions. Some banks even have special programs for higher risk mortgages. The interest rate on banks mortgages are the lowest among other lenders. If you think you are on the verge of qualifying with a bank, talk to us. We can help you get an exception with many bank lenders using our long-standing relationship with them.
Trust Companies and Credit Unions: The minimum score starts at 550 with these lenders. They also have less stringent requirements on income. However, their mortgage rates are approximately 1-3% higher than the banks.
Private Lenders: There is no minimum credit score. Private lenders focus on your down payment and the property. As long as you have enough equity in your home, and the property is in good condition, you will get approved. Private lenders charge the highest interest rate. They also charge a lender fee between 1% to 3%. Every bad credit mortgage is different, and there is no fixed “market rate” for private lenders. As a result, the total cost of using a private lender varies a lot. Our mortgage advisors are happy to help you navigate the private lending landscape. Feel free to reach out to us to learn more.
4. What are the bad credit mortgage rates?
It depends whether it’s a 1st mortgage or a 2nd mortgage:
- Bad credit 1st mortgage rates range between 1% above the bank mortgage rate to 7.99%.
- Bad credit 2nd mortgage rates range between 7.99% and 11.99%
So, how to ensure you get the lowest rate?
- The most effective way is to increase your down payment or home equity. The higher you down payment % the lower your rate will be.
- In addition, lenders also provide volume discount to brokers who work closely with them. Our brokers have extensive relationships with bad credit mortgage lenders. We can guarantee you the lowest rate based on your situation.
5. Why use a mortgage broker when getting a mortgage with bad credit?
- Avoid getting “multiple hits” to your bureau. Every time you apply with a different lender, your credit gets a “hit”. When it happens more than two times within a short period of time, it starts to impact your score. When you work with us, we only check your credit once. We will use it to work with multiple lenders to get you approved.
- Our experienced advisors have seen all the difficult situations. We know how to best structure a deal to get to approval faster.
- We fund a lot of volume. We will use our volume discount with lenders to get you the lowest rate.
- We are a direct-to-consumer online brokerage. We bring the mortgages directly to you rather than going through other middlemen. It further lowers the cost.
Book a quick consultation with one of our experienced mortgage advisors today to get approved!