How to Qualify for a Mortgage with Bad Credit?

Qualifying for a Mortgage with Bad Credit

Many real estate professionals had anticipated the worst-case scenario when the Covid-19 pandemic hit. Predictions included large-scale numbers of mortgage arrears, notable declines in property values, and a drop in the number of home sales in Ontario and Nationally.

Fortunately, none of these fears materialized. The Canadian Mortgage and Housing Corporation (CHMC) had gone so far as to predict as recently as September 2020 that up to 2% of insured mortgages could be in jeopardy of falling into arrears.  In Ontario, despite the pandemic-driven widespread strain on household finances, the actual number of properties in arrears as of November 2020 stands at 0.10% which represents 2,008 properties according to the Canadian Bankers Association.

Nationally, home sales increased by 2% in the single month of January 2021 with the overall year-over-year activity up by 35.2%, according to the Canadian Real Estate Association. January of this year also saw a national average sale price increase of 22.8%.

Housing sales are booming and inventory is tight with the number of buyers outweighing available housing inventory.  

In the Province of Ontario, according to the Ontario Real Estate Association, residential sales activity reported through the Multiple Listing Service (MLS) in Ontario numbered 13,855 units in January 2021. This number represents an increase of 29.5% compared to house sales in January 2020 which is a new sales record for January. Nationally, home sales activity was up significantly, climbing 35.2% from year-ago levels in January 2021.

The average price of resale residential homes sold across the Province in January 2021 was a record $796,884, rising 26.7% from January 2020. The Ontario Real Estate Association has reported that the dollar value of all home sales in the province in January 2021 was $11 billion, a large increase of 64.1% from the same month in 2020. This also represented a  new record for January.

Healthy sales numbers and the steep appreciation in Ontario property are positive news for Ontario Homeowners. If however, an Ontario homeowner is experiencing short-term economic difficulties it can be frustrating to not be able to profit currently from such a healthy real estate market. Especially if there is damaged credit and perhaps less household income during the prolonged pandemic. Can you still qualify for a mortgage with damaged credit?

Credit Scores and Mortgage Approval- Is There Such a Thing As a Credit Too Low to Qualify?

There are three main lenders in the Province of Ontario that can offer various types of mortgage loans. Many homeowners may not be familiar with all three classifications of lenders. Ontario-based lenders tend to fall into three broad categories:

  1. A Lenders– Banks and large lenders. These lenders tend to require quite stringent criteria to qualify for a mortgage loan. Based on recent tightened stress tests imposed by the bank’s criteria include near-perfect credit scores and preference is given to full-time salaried employment.
  2. B Lenders– Credit Unions and Trust Companies. These lenders may not require such high credit scores but still prefer very solid credit standing along with traditional salaried-based employment.
  3. C Lenders– These lenders are private lenders that may lend individually,  as a group of lenders or mortgage brokers that specialize in private lending of mortgage loans. Credit can be overlooked and these lenders will rely on current appraisals of your property and its’ location. Due to damaged credit, interest rates associated with private mortgage loans are higher than those offered by the banks. Interest rates on most types of mortgage loans are between 7% to 12% with fees ranging from between 4% to 6% of the total cost of the loan.

If credit has become a barrier to mortgage loan approval from the banks and credit unions, there is a wide network of private lenders available that will offer secured mortgage loans despite very poor credit. Even credit that is severely damaged will not stand in the way of obtaining a private loan if other assets are available to leverage the loan against and a current appraisal of your property demonstrates at least 20% equity in your property. 

Private lenders will factor in the desirability of the location of your property, all sources of monthly income including self-employed salary and monthly investment income, and will calculate the Loan-To-Value (LTV) of your property. 

These lenders will lend up to 75% LTV which represents 75% of the appraised value of your home. With sufficient demonstrated equity different private loan options are available. Ontario homeowners can obtain second mortgages, equity home loans, Home Equity Lines of Credit (HELOCs), home renovation loans, consolidation loans, short-term bridge financing, and even a new principal mortgage if the current mortgage terms.

Can You Be Disqualified from Obtaining a Mortgage?

The short answer is yes if you are applying with a lender whose criteria are out of reach. If you do have damaged credit, many A and B lenders will not approve you for mortgage financing. Credit plays a very central role in determining mortgage eligibility with these lenders. Insufficient salary and excessive debt can also prevent an Ontario homeowner from securing a mortgage loan.

Also, if you are self-employed, A and B lenders may be reluctant to offer a secured mortgage loan even your property is used as collateral Self -employed income tends to vary month to month and is difficult to prove yearly. Banks will prefer those homeowners with an easily demonstrated consistent yearly salary.

Private lenders will offer financing despite poor credit but homeowners must have at least 20% equity in their property to be offered secured mortgage financing. Too little equity may pose a problem. Location plays a large role, however, the appraised value and equity can offset any drawbacks to location.

Any new debts after you apply for a mortgage loan can disqualify you as well. Insufficient income or lack of income can disqualify a homeowner from further mortgage financing.

Main Steps to Boost Your Chances of a Mortgage Approval

Even though options do exist to obtain a mortgage loan despite poor credit, it is valuable to always be taking steps to help increase your chances of mortgage approval and obtaining the best possible terms on your mortgage.

  • Pull a recent credit report from one of the two major credit reporting agencies in Canada, Equifax or Transunion. Study it carefully and look at the areas that need improving
  • Always pay your credit cards on time and in full if possible
  • Pay down debt as best you can
  • Have a recent appraisal of your property
  • Increase monthly income if necessary
  • Save for a larger down payment

Mortgage Broker Store Can Help Guide You Towards Mortgage Approval Despite Poor Credit

The advantage of private loans is that they are short-term, negotiated quickly and there are different options to fix particular immediate financial circumstances. Most private loans are between 1 to 3 years in length. Long enough to fix immediate financial concerns and enough time to work towards restoring credit to apply for mortgage loans at a later date with the best possible mortgage loan terms. Don’t let damaged credit stop you from addressing concerns you have now. Mortgage Broker Store has vast experience in the realm of bad credit mortgages with access to a broad base of Ontario-based private lenders to arrange private mortgage loan terms to suit your individual short-term financial goals. Don’t hesitate to contact us at your convenience to address any concerns you may have.

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.