Your credit score is one of the key factors that determines your eligibility for a mortgage, which is why it’s important to make sure you’re in good standing before you start this process. Lenders have specific credit score requirements and every borrower needs to meet this criteria in order to qualify. But, what happens if you don’t meet this criteria?
First things first, getting approved for a mortgage is not impossible with a low credit score, and there are options available if you’re in this situation. At Homewise, we shop over 30 banks and lenders to find you the best option, even if you have a low credit score. If you do have low credit and you’re currently searching for a mortgage, here are some things you should know.
What does “low credit” mean?
Low credit is considered to be any credit score below 620. Generally, lenders favour people with credit scores of 680 or higher. If you’re in the 600 to 680 range, this is considered “mid-level” credit. If you fall into this category, there are Prime A lenders that offer strong rates and features that you may be eligible for. However, a lot of big banks are likely to turn down mortgage applications with these scores. That’s why at Homewise, we also work with both credit unions (such as DUCA Financial and Desjardins) and monoline lenders (such as MCAP and First National) because they often have more leniency with clients in these situations. So, even if you’re in the mid-level range, it’s still possible for you to still get approved for a great mortgage.
Types of Lenders
Prime A lenders are traditional lenders such as big banks and credit unions. They focus on borrowers with good credit scores and a steady source of income.
B Lenders are often very large, some of which are banks (like Equitable Bank). They are typically used when borrowers are turned down by A lenders and offer more leniency when it comes to qualifying for a mortgage. These lenders often have higher rates and require a 20% minimum down payment. Their terms are usually 1 or 2 years, as the goal at the end of the term would be to switch to a Prime A lender if possible.
Private lenders are short-term and typically lend on one-year terms. These lenders are not represented by traditional banks, monoline lenders or credit unions, and are used when borrowers are unable to qualify with A or B lenders. Their requirements are much less stringent as the mortgage is heavily focused on the property and not the owner’s qualifications. However, their interest rates will be higher compared to A and B lenders and come with a percentage fee.
What are my options if I have low credit?
To recap, low credit is generally when your credit score is below 620 and therefore more difficult to get approved with a Prime A lender. That’s why it’s important to be aware of other options such as B lenders. B Lenders are companies like Home Trust, Canada Western Bank and ICICI Bank, who are able to help people with lower credit get a mortgage.
B lenders will require you to make a larger down payment (20% or higher), rates will be slightly higher compared to A lenders (if interest rates are at 2%, you’ll pay 4% and have a small fee) and you’ll be subject to a one-year or two-year term. The goal is to improve your credit over this one to two-year period so that you can later refinance at the end of the term into a Prime A mortgage.
At Homewise, we work with many B lenders to secure mortgages for our clients who may have been turned down by big banks. B lenders are a popular option as they allow people to keep their current homes, or buy a new home without having to subject themselves to higher rates with private lenders.
What if I’ve had a recent bankruptcy?
If you’ve had a recent bankruptcy, the steps you can take to move forward will depend on the type of lender you’re working with.
A lenders will require you to be discharged from bankruptcy, along with a minimum of 6 years of re-established credit.
For B lenders, the requirements will vary across the board. For example, some B lenders will require the bankruptcy to be discharged along with a minimum of 2 years of re-established credit, while others may just issue higher rates and allow you to get approved right after your bankruptcy/consumer proposal.
Private lenders, on the other hand, do not impose any of these requirements; their rates will be highest compared to A and B lenders alike, but you can get approved for a private mortgage if you are in a bankruptcy.
What if I’ve had a consumer proposal?
For a consumer proposal, there are less stringent regulations compared to a bankruptcy. In this case, a prime A lender will be open to lending two years after a bankruptcy has been discharged if credit has been re-established and in good standing. Of course, there are other requirements such as low debts and strong employment income.
Some B lenders will provide mortgages two years after discharge if credit is re-established and some will even provide a mortgage during a consumer proposal, however, more ownership of the property is often needed and rates will be higher. If a prime A lender does not approve the borrower, B lenders are a good option. If you cannot get approved by a B lender, private lenders would be the best option in this situation.
What if my credit is too low, my income is too low or my debts are too high?
If your income and credit score are too low or your debts are too high, this is when you can consider private mortgage options. Private mortgages come at a higher rate with additional fees, but are gaining popularity because they provide a solution to many people who don’t meet the typical lender criteria. Also, while rates are high, if you do need to consolidate your debt to get your credit and debt ratios back on track, the rates are much lower compared to other types of loans. Private mortgages are a good choice for a homeowner who needs an option to keep their current property, or for a home buyer who cannot meet the requirements of an A or B lender.
If you have low credit, your chances of securing a mortgage are still good, especially if you apply in the right places and take the right steps. Oftentimes, people underestimate what types of lenders they’re eligible to work with. People searching for a B Lender may actually be eligible for a Prime A lender, further, people who think they need a private mortgage option could be eligible for a B lender, which could save them thousands of dollars in the long run. At Homewise, we search the marketplace for the best options so you’re not overpaying, and locking in a full-feature mortgage that supports your unique needs.