Bad Credit Mortgage Options in Ontario

How lenders assess a low credit score

Your credit score is one part of a mortgage application. Lenders also look at your income and how well it can support the payments, your existing debts, the property offered as security, and your ability to repay over the term.

Lenders set their own criteria, and those criteria vary by lender and by mortgage program. A low score can narrow the list of lenders who will consider your file. It does not set a single cutoff that applies across Ontario, and a strong property or stable income can make a difference to what is available.

Common causes of poor credit

Credit problems often have a clear cause. Knowing what appears on your report is the first step in planning an application.

Bankruptcy and consumer proposals

A bankruptcy stays on your credit report for a period set by the credit bureau, and the period can depend on the province and on whether it is a first or repeat bankruptcy. A consumer proposal also appears on your report for a set period. Ask Equifax or TransUnion for the exact dates on your file. Lenders will review the full history, not only the notation.

Collections, judgments and tax debts

Unpaid collection accounts and court judgments appear on a credit report and can affect how a lender assesses a file. Unpaid federal tax can also affect a property. Existing liens, debts and judgments can affect title, the net amount available from a mortgage and lender eligibility. A licensed mortgage broker and a lawyer can review your specific situation.

Life events

Job loss, illness, divorce and family emergencies can change a financial picture quickly. A broker can explain how lenders view a recent change in income or a recent gap in credit history, and what documents will support the file.

The role of property equity

Equity is the difference between a property's market value and the total amount owing against it. It matters to a lender because it affects how much of the lender's money is protected by the property.

Equity is one underwriting factor, not a guarantee of approval. The loan-to-value (LTV) ratio measures the amount being borrowed against the property's value. Lower LTV usually means more lender options and more favourable terms, but the lender also assesses affordability, the property and whether the repayment plan is achievable.

If you already have a mortgage, a second mortgage adds secured debt to the property. It does not reduce the combined LTV, which is the total secured mortgage balances divided by the property value the lender uses.

Comparing rates and fees

Rates and fees depend on the lender, the product, the term, the amount, the property and the file as a whole. This article does not quote rate or fee ranges.

When you compare offers, ask for a written quote that shows the interest rate, the annual percentage rate where it applies, the term, all fees, the conditions and the net amount you will receive. Compare the total cost over the term, not only the rate.

Steps to improve your credit

Improving a credit file takes time, and results vary. These steps can help:

• Pay every obligation on time, including your mortgage payments
• Check both credit reports for errors and ask the bureau to correct any you find
• Try to keep credit card balances low compared with the limits
• Set up automatic payments for recurring bills
• Avoid unnecessary credit applications, because each one can appear on your report
• Consider a secured credit card if it is affordable and you are approved for one

These steps do not guarantee a higher score or lender approval. A licensed mortgage broker can explain how lenders in your situation would review your file, and when it may make sense to apply.