The reality for the vast majority of Canadians is that if you want to buy a home, you’re going to have to take out a mortgage. At least when it comes to purchasing a first home, most Canadians don’t have the cash on hand to pay for a house without taking out a long-term loan. This means going to a lender, such as a bank or credit union (or a private lender in some cases), putting money down and signing the paperwork on a mortgage that could take as long as 30 years to pay off.
When a bank issues you a mortgage, they are assuming a considerable amount of risk. Will you make your payments on time, or will you default on the loan? The sheer number of mortgages that went into default in the United States in 2007 and 2008 led to major disruption within the banking industry and brought the global financial situation to its knees. This is why the Canadian government joined most of the rest of the world in boosting the rigor of the underwriting process.
So, a prospective borrower in Canada today will have to go through scrutiny of their credit report. While any score above 660 is considered good (which makes you a low default risk), if you want a mortgage through a traditional lender, a score above 680 is ideal. Such factors as payment history (on-time payment), utilization of your credit (ideally, less than 35% of your available balances), types of credit (having a blend of debt such as a car loan and a credit card), credit history (the average age of your accounts) and age of recent inquiries all play a role in that score. If you don’t know your score, Equifax Canada or TransUnion can send you a free report once a year.
A higher credit score can lead to a lower interest rate. Other factors include your pre-tax income, your living expenses and the amount of debt you currently have (ideally, no more than 44% of your gross income, including total monthly housing costs). In Canada, federally regulated banks require you to pass a stress test. This puts your current financial situation through a simulation with an interest rate of either 5.25% or your negotiated interest rate plus 2 per cent, whichever is higher. Because you can’t get a 30-year fixed-rate mortgage in Canada (you can’t sign a loan with a term longer than 10 years), you’re going to have to deal with potential interest rate changes several times over the loan period. The purpose of the stress test is to determine whether you can continue to make your mortgage payments even if mortgage prices spike.
Can You Get a Mortgage with Bad Credit in 2025?
There are plenty of people who can afford to pay a mortgage despite having “bad” credit. If your credit score is 500 or higher, it’s likely that you can find an alternative lender to work with you. Traditional lenders in Canada have one of three ratings, based on the type of borrowers they work with. There are “A” lenders, “Alt-A” lenders, and “B” lenders, and each of them deals with a different sector of the borrowing population. The “A” lenders deal with the best borrowing profiles, and then come the “Alt-A” and then the “B” lenders.
But what if you can’t get approval from a “B” lender? You may have seen your credit score take some damage – maybe you got behind on some prior debts, used too much of your available credit, or asked for new loans too frequently. You also might not have much credit history yet. You don’t have a string of late payments, but maybe you just got your first credit card and your first car loan in the last three years. You just got out of university, but you’ve been living at home and saving money at a high rate in order to afford a home. Then you head to a bank and hear that you just don’t have enough credit history to qualify for a mortgage, even though you have a solid down payment and employment history.
No matter what scenario you find yourself in, a mortgage with bad credit can be attainable. When you look for the bad credit loans Alberta and other provinces have available, you need to be prepared to pay a higher interest rate than what you would find at an “A” bank. However, the other side of this is that you have access to funding the home you’ve been dreaming of today.
The Role of Private Lenders in Bad Credit Mortgages
Private money lenders help borrowers who are ready to start making payments on a property now but can’t get an approval from the traditional lending market, despite having a down payment of 20% – 25% of the purchase price or more. These borrowers usually have plenty of money set aside to start making payments, but they have one or more issues on their lending profile that make the traditional banks and credit unions stay away from the loan.
Sometimes private money lenders turn out to be the right option for borrowers who have been laid off in the last year or so and just found a new position. Their employment history has a gap, but they might still have ample savings to make a down payment and continue paying their living expenses. In other cases, borrowers have some non-traditional revenue streams, which can range from gig work to self-employment. Because working for yourself is not always the most stable professional environment, some banks and credit unions don’t want to work with the self-employed, even if they’ve been fairly successful.
In other cases, a borrower has gone through a divorce or a health crisis that caused some disruption to their financial picture. Maybe they had to take on a good bit of revolving debt, but since then, they’ve figured things out and gotten their balances down and their payment histories back where they need to be, but the blemishes on their credit reports will be there for several more years. That’s a person who can pay a mortgage even though they might need another year or two to get their credit profiles cleaned up for the banks.
Private lenders offer financing on terms of a year, maybe two years, and in many cases only ask for the borrowers to make payments on the interest instead of the principal. They’re expecting that the borrower will be able to gain approval from a traditional lender by the time the private loan comes due. Because Traditional Lenders require there to be 20% equity or greater to refinance, the initial down payment needs to be 20% – 25% or greater at the time of purchase. People looking for the loans for bad credit Ontario and other provinces offer can get this sort of short-term financing from a private lender, move into their home, keep working on their credit, and have things in order at maturity. Then they can get a traditional lender to take over the note, pay the principal back to the private lender, and keep on moving toward home ownership.
The benefits of this include the ability to get into a home sooner, instead of signing another year-long lease, missing out on a dream home, and pouring more money into the vacuum known as rent. Even though taking out a private loan doesn’t mean making much progress toward home equity (especially if the private loan involves interest-only payments), it helps the borrower lock in the purchase price of the home – always a valid goal given the way the real estate market in Canada continues to spiral upward in terms of value. It also gives the borrower the peace of mind that comes with knowing that they have the home they wanted.
Alternative Financing Options for Borrowers
If you find yourself Googling such terms as “bad credit loans Alberta” or “bad credit mortgage Canada,” it’s time to give contact Amansad Financial. We’ve already done the work associated with finding the right private lenders for potential borrowers in different situations.
Some private money lenders are wealthy individuals looking to profit from investing in the real estate market through direct lending. Others are companies that focus on “hard money” lending, investing in borrowers who represent a higher degree of risk. At Amansad Financial, we work with both of these groups of lenders, in addition to Mortgage Investment Entities that pool funds to provide larger loans (jumbo) exceeding $1M.
The ideal profile for someone who would benefit from private money lenders is a borrower who is a year or so away from credit score improvement or someone who has gone through transition professionally and could benefit from working for the same employer for another solid year. Those are all factors that banks use to consider when approving mortgages.
We have worked with many borrowers in the same position and connected them with private money lenders that were able to meet their needs for 12-24 months and then help them transition into a mortgage with a traditional lender. While the interest rate for a private loan will be higher than what a traditional lender would provide, the costs are often lower than having to move to a rental for a year and then move again, and the personal benefits of having the home you want at the price you want today, even if the costs of financing that home are slightly higher over the life of the loan than they would have been with immediate approval from a traditional lender. Please reach out to Amansad Financial today!