Bruised credit? You still have options for getting approved for a mortgage

Last year proved to be an interesting one for mortgages. The COVID-19 pandemic has had lasting effects on the global economy, rates of unemployment and, more specifically, the financial stability of many Canadian households. Since March 2020, 16 per cent of mortgages in Canada have been deferred to help homeowners who were financially impacted by the pandemic – a number that has slowly fallen since then.

During the pandemic, credit cards, car loans and other bank loan payments were also deferred, which has considerably impacted the credit scores of many people across the country. This has left many Canadians in financial situations where their credit score has dropped, sometimes significantly, and their mortgage options may have become more limited. Especially if you find yourself in a situation where your debts have accumulated and you want to leverage your home equity to borrow against your home to refinance and consolidate your debts.

What does ‘good’ credit mean?

Lenders typically favour homebuyers with credit scores of 680 or higher and use this to evaluate the strength of a mortgage application.

If you’ve been slightly impacted by the pandemic and find yourself in the 600 to 680 range, this is considered “mid-level” credit. The good news is that there are many Prime A lenders, such as credit unions and monoline lenders who offer more leniency compared to the big banks, along with favourable mortgage rates and features. These sources can be an option for an approval.

What are your mortgage options with low credit?

Low credit is when your credit score falls below 620. Being in this range makes it more difficult to get approved with Prime A lenders.

If your financial situation has changed or your credit score has lowered as a result of the pandemic, there are still options available for you. When you can’t get approved with A lenders, exploring different B lenders is a good alternative.

B Lenders make it possible for people with low credit, less income or high debts to get approved for a mortgage, with some additional requirements. Buyers are usually expected to make a larger down payment of 20 per cent or higher, and are subject to slightly increased rates compared to A lenders. When you work with a B lender, the terms are shorter (one to two years) to give homeowners an opportunity to improve their credit and later refinance into a better Prime A mortgage.

If your income and credit are too low and your debt is too high for A and B lenders, private mortgages are a potential option. These lenders come at a higher rate with additional fees, but are a common solution for those who cannot meet the standard lender criteria. Private mortgages are an option if you’re in a situation where you’re having trouble meeting A and B lender requirements and want to ensure you keep your current home.

What happens if your credit is low when you renew?

If your mortgage is up for renewal and your credit score has fallen below your lender’s criteria, it may be time to start searching for a different lender. When you receive a notice for mortgage renewal, it’s important to know that you’re not obligated to sign back under the same terms. If you’re looking for a better alternative to your current mortgage, you have the option to either negotiate with your current lender or shop around and switch lenders for a better mortgage.

At Homewise, we have seen many clients in this situation recently. More than ever before, lenders are checking credit on renewals to ensure clients can meet their mortgage needs. That’s why we work with many Prime A, B and private lenders to ensure clients get approved – especially if you are in a situation where you want to leverage your home equity to consolidate your debts and refinance. Shopping around is integral to ensuring you find the right mortgage for your needs.

If you’re worried about your mortgage situation, it’s important to know that there are other options available to you. These alternatives give you an opportunity to get back on your feet and secure a more stable financial future.