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Lenders that are willing to lend to borrowers with a bad credit score will require you to pay a higher mortgage rate, which can make a bad credit score a very costly status to have. Since bad credit mortgages are usually a temporary and last-resort measure, the typical term length for a bad credit mortgage is 6 months to 2 years (Barrhaven Mortgage Broker).
This is no different when applying for a mortgage. Your mortgage lender will look at your credit history and your credit score to see how you have been handling credit with other creditors. If you’ve had a rocky past with other lenders by not paying on time or even by defaulting on previous loans, this will be a large red flag that your lender will carefully scrutinize.
Your credit score is calculated based on your credit report. Your credit report contains information that lenders have sent to Canada's two main credit reporting agencies: Equifax Canada and Trans, Union Canada. Your credit report contains information such as your payment history, the balance of your debt, your credit limit and the age of your accounts, the type of debt that you have, any bankruptcy or past-due collections history, and a record of when lenders have checked your credit report.
Making a payment a few days after the due date doesn't automatically result in a massive drop in your credit score. While your creditor may charge a late penalty fee, charge interest on the overdue amount, or increase your interest rate if you've had previous late payments in the same year, your late payment won’t show up on your credit report if you made the payment within 30 days of the due date.
Late payments are categorized based on how late they are: 30-day, 60-day, 90-day, and 120+ days. The later your payment, the worse the impact is on your credit. Once a late payment has been reported to Equifax or Trans, Union, the late payment will stay on your credit report for up to six years.
Your lender has given up on collecting from your delinquent account and will usually hand off your debt to a collection agency. This will have a very large negative impact on your credit score. Not all borrowers will face the same impact from a late or missed payment. Borrowers with a higher credit score will encounter a larger drop in their credit score compared to a borrower who already has a low credit score.
While you can try to negotiate with your lender to have the late payment removed from your report, it will still take you a long time to build your credit score back up. Credit Score and Mortgages, Mortgage lenders will look at a variety of information and resources when assessing your mortgage application.
The lower your credit score, the lower your credit rating. Most Canadians fall in the upper end of this range. The Canada Mortgage and Housing Corporation (CMHC) collects data on Canada's housing market and debt, including on credit scores of mortgage borrowers. According to the data:The CMHC found that the average credit score of Canadians that don't have a mortgage was 753 in 2020.
Digging deeper, 87. 71% of mortgages in 2020 were held by borrowers with a credit score of 700 or higher. What does this mean to you? If you have a credit score less than 753, that means that you have a below-average credit score. You might not get the absolute best mortgage rates, but your fair credit score can still get you a mortgage at many lenders.
Insured mortgages are intended to protect mortgage lenders from risky borrowers, and more specifically, they are for where the borrower puts down a small down payment. Interestingly enough, the CMHC has a minimum credit score of 600 in order to qualify for a CMHC-insured mortgage. If you have a credit score less than 600, the CMHC considers you to be too risky to qualify for their mortgage default insurance.
Being ineligible for CMHC insurance is a sign that you have a bad credit score. Not meeting CMHC’s minimum credit score requirement can disqualify you from many mortgage lenders that only offer CMHC-insured mortgages, such as some B-Lenders. Having a bad credit score doesn’t mean that you will never qualify for a mortgage, but it does mean that you have less options when it comes to mortgage lenders available for you.
Many have no such requirement, and so they and B lenders are some of the only options available to those with bad credit. Getting a bad credit mortgage from a private lender is an option since private lenders are more flexible and have less stringent lending requirements compared to the major banks, and so they can help you no matter your financial situation.
If something goes south and you default on your bad credit mortgage, private lenders want to be able to sell your home quickly through a while recouping the full amount of their investment. However, be aware that a private mortgage can be much more costly than one from a traditional bank.
You’ll also need to have a large down payment or home equity, as in a low (LTV), in order for private lenders to take on your bad credit mortgage. Since having a low LTV will make it easier for private mortgage lenders to recoup their lost investments on defaulted bad credit mortgages, private lenders can even work with those who have recently gone through a bankruptcy.
You can use to help connect you to B-Lenders and private lenders. For example, MERIX Financial’s NPX mortgages target those with bad credit scores or with non-traditional income. B-Lenders and private lenders may charge additional fees to your mortgage, which can significantly add onto your cost of borrowing. These fees are usually based on the total amount that you are borrowing.
This would be $10,000 in upfront fees. If you were to renew your private mortgage or switch to another private lender, you may still have to pay private lender fees again. This is why it’s important to have an exit plan when going with a private lender. Instead of having your bad credit mortgage stay as bad credit, you’ll want to work to improve your credit score so that you can transition to less costly lenders.
B-20 sets minimum requirements when assessing a borrower. While B lenders can choose to follow them, and some B lenders do enforce them in their policies, not all B lenders do. On the other hand, private lenders do not follow B-20. This makes B lenders more of a mixed bag when looking for a mortgage with bad credit.
This includes a minimum credit score of 600. Other B lenders have looser requirements. For example, MERIX Financial has a whole product line that caters to borrowers with blemished and bad credit. Since having bad credit already closes many doors, it’s best to try as many options as you can.
B lender mortgage rates are generally lower than private mortgage rates, and you’ll also encounter fewer fees with B lenders. Just as an example, will almost always be lower than private mortgage rates. The main question is whether your local credit union will accept your bad credit score, which private lenders might happily accept in exchange for very high rates and fees.
Pros and Cons of a Bad Credit Mortgage, Easy to be approved, Very high interest rates, Can be used temporarily while you improve your credit, Only available if you have a large down payment or home equity, Frequently Asked Questions about Bad Credit Mortgages, What If I Can’t Fix My Credit Score? It’s important to keep in mind that your credit score isn’t the only thing that mortgage lenders look at.
Making a large down payment can make it easier to be approved for a bad credit mortgage. If you can find a co-signer, their credit score will be considered as well. This is helpful if they have a strong credit score or more income. If you are over 55 years old, you are eligible for reverse mortgages (True North Mortgage Ottawa).
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