Can You Get a Mortgage with Bad Credit?

Buying a home is one of life’s most significant milestones, but getting a mortgage can be challenging for many people, especially without good credit. In Canada, your ability to borrow money for a house largely depends on your credit score, income stability, and current debt levels. Major banks and traditional lenders generally look for potential borrowers with strong credit histories, a history of making timely payments, and low debt-to-income ratios. These factors go a long way toward determining the interest rates and loan terms you’re offered. Not everyone has a perfect credit report, however. A history of missed payments, high credit utilization, or even a negative consumer proposal can negatively impact your credit score and, in turn, your chances of getting approved for a mortgage.

However, even with a poor credit score, it may be possible to qualify for a mortgage. While the process is generally more complex and the terms less favourable than traditional lending, many alternative lenders are still willing to work with you. Mortgage brokers and private lenders alike often have programs for borrowers who don’t meet traditional lending standards. If you’ve struggled with late payments, collection agencies, or other financial setbacks, getting your debt under control can be the first step to improving your lending options and securing a mortgage with bad credit in Ontario.

What Is Considered a Bad Credit Score?

Credit scores in Canada range from 300-900. This is a largely arbitrary metric, though higher scores generally indicate better creditworthiness. A score of 650 or higher is widely considered good, while anything below 600 is usually regarded as poor. If your score falls below 600, major banks and other traditional lenders may view you as a high risk. This can lead to higher interest rates, larger down payment requirements, or outright denial of mortgage applications.

You can wind up with a bad credit score due to a history of late payments, uncomfortably high credit utilization (using too much of your available credit), or negative marks such as collection agency reports or a consumer proposal. If you’ve struggled to pay bills on time or have hit the limit on your credit cards, your credit score might be lower than you’d like. Even with a poor credit score, you could secure a mortgage in Ontario.

Does a Consumer Proposal Impact Your Ability to Buy a House?

Consumer proposals are legally binding agreements in Canada that you can file to partially settle your debts. This process allows you to settle your debts with creditors for less than what you owe. While it can be a helpful way to manage overwhelming debt, it impacts your credit score and, potentially, your ability to get a mortgage. A consumer proposal remains on your credit report for a maximum of six years from the date of filing. The presence of this documentation can be an issue, as it significantly lowers your credit score when it’s active.

This doesn’t mean you can’t buy a house if you’ve entered into a consumer proposal, but it does make things more complicated. Lenders see a consumer proposal as a sign of recent financial distress, which can make them hesitant to approve your mortgage application.

Here are some steps that can help you increase your chances of obtaining a mortgage after a consumer proposal:

1. Wait until your consumer proposal is completed and discharged.
2. Check your credit report for errors and ensure the dates and notations regarding your consumer proposal are accurate.
3. Rebuild your credit score by using secured credit cards, making timely payments, and keeping credit utilization low.
4. After a period of time, apply for a second credit source. Mortgage lenders look for 2 or more new credit lines after a consumer proposal and a total credit limit of $3,000 or more. This should give you a credit score of 700.
5. Save for a larger down payment, ideally 20% or more, to offset the perceived risk.
6. Work with a mortgage broker experienced in post-consumer proposal situations.
7. Be prepared to pay higher interest rates initially.
8. Gather documentation proving steady income and employment stability.
9. Be patient and persistent. It may take 2-3 years after completing your proposal to qualify.

Remember, each lender has different criteria, so explore multiple options to find the best fit for your situation.

The Canada Mortgage and Housing Corporation (CMHC) will only give you mortgage insurance if you have been out of your consumer proposal for two years. If you want to apply for a mortgage sooner, you must have a 20% downpayment, so you qualify without CMHC insurance.

You may need to seek alternative or private mortgage lenders specializing in working with individuals in these situations. These lenders may offer higher interest rates and require larger down payments, but they provide a viable path to homeownership for those with poor credit or recent consumer proposals.

How to Qualify for a Mortgage With Poor Credit in Canada

Qualifying for a mortgage with poor credit in Canada is not impossible, but it requires a different approach than those with better credit ratings. Here are some practical steps to improve your chances of approval:

1. Demonstrate stable income. Lenders want to see that you have a reliable source of income to cover your monthly mortgage payments. Having steady employment or consistent income from self-employment can reassure lenders, even if your credit score isn’t stellar.
2. Reduce your debt. Paying existing debt can improve your credit score and show lenders you’re capable of managing your finances. Focus on reducing high-interest debt, such as credit cards, to lower your credit utilization ratio. Sometimes it is better to file a consumer proposal to eliminate existing unsecured debt that may prevent your mortgage approval regardless of your current credit rating.
3. Save for a larger down payment. A larger down payment can reduce the lender’s risk, making it more likely that they may approve your mortgage. It also decreases the amount you need to borrow, which can lead to favourable loan terms.
4. Work with a mortgage broker. Mortgage brokers have access to a wide network of lenders, including alternative and private lenders, who may be more willing to work with borrowers with poor credit. They can help you find the best rates and terms available for your situation.
5. Consider a co-signer. If you have a family member or close friend with good credit who’s willing to co-sign your mortgage, it can increase your chances of approval. Just remember, the co-signer is equally responsible for the mortgage, so it’s not a decision to take lightly.

The Risks of Bad Credit Mortgages

While bad credit mortgages can help you achieve homeownership, they come with their own set of risks. It’s important to be aware of these risks before you commit to a mortgage:

1. Higher borrowing costs: Lenders typically charge higher interest rates for bad credit mortgages to compensate for the increased risk. This means your monthly mortgage payments will be higher, and you may pay more in interest over the life of the loan.
2. Larger down payment requirements: To offset the risk, lenders may require a larger down payment from borrowers with poor credit. This can make it more challenging to save for a home.
3. Shorter terms: Bad credit mortgages often come with shorter terms, meaning you need to renew your mortgage more frequently. This can result in more frequent credit checks and renegotiation of terms, which could be difficult if your credit hasn’t improved.
4. Potential for foreclosure: If you’re unable to make your mortgage payments, you risk losing your home to foreclosure. This serious consequence can further damage your credit and make it even harder to secure a mortgage in the future.

Assess Your Financial Situation With a Licensed Insolvency Trustee 

If current debt balances, including credit cards, bank loans and lines of credit, are the reason you are looking at a bad credit mortgage, it’s crucial to assess your financial situation honestly. A Licensed Insolvency Trustee can provide valuable insights into your financial health and help you explore options like consumer proposals or bankruptcy if necessary. LITs are trained professionals who can help you understand your debt situation and guide you toward the best solution for your needs.

While having a bad credit score can make getting a mortgage in Ontario more challenging, it’s not an insurmountable obstacle. By taking steps to improve your financial situation, working with the right lenders, and seeking professional advice when needed, you can still achieve your dream of homeownership.

If you’re struggling with debt, consider reaching out to a qualified debt trustee at Hoyes, Michalos & Associates Inc. for a free debt assessment. We can help you navigate your financial challenges and find the best path forward, whether securing a mortgage, reducing your debt, or rebuilding your credit.

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