Hey, we're not here to judge. There are a lot of reasons why your credit score may be in less than tip-top shape. The pandemic alone has impacted the financial situation of many Canadians who may have seen their credit scores fall over the past year. Does poor credit mean that you won't be able to get approval for a mortgage if you apply? Not necessarily, though you may have fewer choices available to you. Your best option is to work with a mortgage broker who can help you find alternative lending options beyond the Big Six banks in Canada.
The Banks Like a Sure Thing
Banks in Canada are very conservative. They also have stringent regulations to follow when evaluating mortgage applications. The regulations are set by the Office of the Superintendent of Financial Institutions (OFSI), which regulates Canadian banks. It is OFSI that established the mortgage stress test (link to new blog) and other requirements such as minimum acceptable down payment and credit score limits for new mortgage applications.
As of June 1, 2021, banks will require mortgage applicants to have a credit score of at least 680. That's an increase from a score of 600, which is sure to affect a large number of people who either don't have an extensive credit history or have a poor history. Even if you co-apply for a mortgage with a partner, at least one of you needs to have a score of 680 or higher. For context, 680 is considered a 'good' credit score. A score of 620 or less is considered 'poor' and anywhere between 621 - 679 is 'average.' So if your credit score is average or worse, the banks probably can't help you.
Alternative Lending Options - The B Lenders
In addition to the Big Six banks, most credit unions, trust companies and insurance companies are considered A lenders. These financial companies are regulated by OFSI and therefore use similar criteria for mortgage applications. However, alternative lenders or so-called B Lenders are increasing in number across the country in response to the growing number of Canadians whose financial situation makes them appear to be too risky for the A Lenders. A poor credit history and a below-average credit score being one of them.
B lenders have less stringent qualifying criteria and greater flexibility in their application process. Many are FinTech companies exploring different credit models and using AI to help evaluate risk. They may be more open to accepting less traditional forms of income and willing to take a chance on a rocky credit history. B Lenders may also find alternative forms of collateral acceptable. You'll pay a higher interest rate because of the risk, however, B lenders can be a good option when you cannot get mortgage approval from the banks.
Renewing Your Mortgage When Your Credit is Bad
Typically, if you have a history of making your payments on time, lenders will have no reason not to offer you a renewal when the time comes. However, if circumstances have resulted in multiple missed or late payments, especially close to renewal time, it is possible that the lender will decline to offer you a renewal, and you may need to look elsewhere for a new mortgage or alternative financing.
Credit Can Be Repaired
If you find yourself having difficulty getting or renewing a mortgage, it doesn't mean you'll never qualify again. Lenders need to see a pattern or positive credit management for at least a short time before they will consider you, so show them one.
Repair your credit score by making payments on outstanding loans and credit cards on time, every time. Consolidate credit and cancel credit cards that you won't use. Avoid maxing out credit cards and lines of credit. Get a short-term loan (sometimes called a bridge loan) from an alternative lender to generate a positive payment history. Eventually, your credit score will begin to rise.
Provided you meet the other A lender criteria, including the stress test and gross and total debt service ratios, you'll be back in the running for A lender offers.
Mortgage brokers can be an invaluable partner to help you find a suitable mortgage when your credit score is sagging, or you've been rejected by the banks for any reason. Mortgage brokers have access to multiple alternative lenders and private lenders and can find you the best rate with the most manageable repayment terms. Call Dave Destefano, The Mortgage Group representative in Niagara Falls, ON, to talk about your situation and find the right mortgage option for you.