The answer is yes, you can get approved for a mortgage with bad credit. But it won’t be through a traditional bank or credit union. There is no shortage of alternative lenders ready to look at your application through a different lens. They’re called B lenders and private lenders. And they care more about your income, down payment, and equity in the property than your credit score.
The problem is that you probably don’t understand where your credit score places you in the lending hierarchy. Because that tells you who is realistically willing to lend, what’s required of you, and the costs involved.
To understand what mortgage approval looks like for people with bad credit history, I asked three mortgage brokers who routinely work with weak-credit files to break it all down. Here’s what they told me about alternative lenders.
Mike Loeppky: Understand What Lending Tier You’re Actually In
Mike Loeppky has been arranging mortgages since 2009 through Castle Mortgage Group in Winnipeg, Manitoba. He defines ‘bad credit’ as a score of 600 and under, and says borrowers with bad credit don’t realize how diverse the lending world really is.
“In Canada, there are several tiers of lending options,” he says. At the top is prime, often called A lenders. “These are the best rates,” says Loeppky. Borrowers can qualify with as little as 5% down. Prime lenders are traditional financial institutions, like the Big Six banks and credit unions, for example. They require a credit score of at least 600, “but that is slowly increasing,” he said. Prime lenders also want employment income that can be easily verified by pay stubs or tax returns if self-employed.
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Then there are alternative lenders, which refers to anything other than prime lenders. B lenders cater to people with bruised credit, accepting scores as low as 500. But you’ll likely need to make at least a 20% down payment, and your housing costs plus debt payments should not be more than 50% of your income. B lenders rely on risk-based pricing, which means the lower the credit score, the higher the interest rate. Right now, their rates are around 5.5% plus a 1% lender fee.
Private lenders accept credit scores as low as 400, but Loeppky calls them “the lenders of last resort.” In his experience, private lending often requires a 35% down payment, and borrowers should expect the “highest rates and lender fees,” with interest rates as high as 12% plus a 3-4% lender fee.
Loeppky says the lowest score he has seen approved was in the 400’s, and the deal worked because there was tons of equity in the property. The private lender was confident they could sell it and get their money back should the borrower default on the mortgage.
Zhino Othman: Your Credit Score is Just One Piece of the Puzzle
“Income affects debt service ratios,” explains Zhino Othman, and that often matters more than your credit score. Othman is an Ottawa-based broker who has arranged mortgages across Canada since 2019. “If a borrower with bad credit has a higher income, it will lower the ratio and make the lender feel more comfortable with the risk.”
A debt service ratio is the percentage of your income that would go towards your housing costs and other debts each month. Lenders use it to determine whether you can realistically afford the mortgage payments. In his experience, there is no hard and fast threshold because each file is unique. Borrowers with a bad credit history can still qualify if their income is stable and their debt load is manageable.
When income and debt ratios are problematic, the next best approval lever is the down payment. It changes both affordability and lender risk at the same time by reducing the amount you need to borrow, which typically lowers the monthly payment, too. This makes the loan more affordable.
It also lowers the loan-to-value (LTV) ratio, which is how much you are borrowing compared to what the home is worth. The higher the down payment, the lower the loan-to-value ratio,” says Othman, and that added equity makes lenders more comfortable, especially since many B lenders set maximum LTV limits based on the borrower’s credit score.
He recently worked on a file where the borrower had a score below 500, multiple missed payments, and maxed-out credit cards. Their lender was preparing legal action, so Othman arranged a short-term private mortgage as a stopgap until the property could be sold. “The borrower had lots of equity in the home, which was the assurance the private lender needed.”
If you’re fresh out of a bankruptcy or consumer proposal, he says B lenders often want to see re-established credit before they’ll take the file seriously. He points to the “2-2-2” rule for your credit file, which is “Two trade lines with a minimum limit of $2,000, and open for at least 2 years.”
Ron Butler: The Bigger the Down Payment, the More Flexible Lenders Get
“As soon as you go below 625, they’re looking for reasons to say no,” says Ron Butler, the principal broker at Butler Mortgage, where he’s been arranging mortgages for 30 years. He explained that while technically the minimum credit score for prime lending is 600, the reality is that sub-625 scores face much lower approval odds.
It triggers tougher income scrutiny, a bigger down payment requirement, and more emphasis on equity in the property. But more surprisingly, credit is not always the thing that kills the deal.
“Income verification pushes more people to alternative lenders than credit score,” says Butler. Prime lenders have very strict income verification requirements that cannot be waived. But alternative lenders are more flexible and can consider a wide range of income sources.
Butler says alternative lenders take a “gross receipts approach,” looking at bank statements and other proof to confirm income. If you’re self-employed, they want evidence that your business is real and operating. “You’ve got to have a website, you’ve got to have a separate bank account for that income,” he says.
Alternative lenders approve mortgages and set interest rates based on loan-to-value, which is a function of your down payment. “If you’re able to produce a 35% down payment, alternative lenders will do their very best to accommodate income from all sources.” With only 20% down, they’re much more stringent.
Private lenders are the most equity-focused and generally don’t care about your income or credit score. That’s good news if you have a bankruptcy or consumer proposal in your recent past. “Private lenders just care about the property and typically want 25-35% down,” says Butler. B lenders can sometimes approve, but they’ll take a much closer look at the story behind your insolvency.
How to Get Approved for a Mortgage with Bad Credit
If these interviews taught me anything, it’s that your credit score only matters if you want the best rates from a prime lender. If all you care about is just getting approved, knowing where to apply is half the battle. Because every tier of lending plays by slightly different rules.
Prime lenders are extra extra picky about credit and income. B lenders look past bruised credit if your income and debt ratios are workable and you provide a minimum 20% down payment. Private lenders care more about equity than anything else and require the heftiest down payments. But remember, all that flexibility comes at a cost with higher interest rates and additional lending fees.
So instead of asking “how do I get approved with bad credit?” you need to ask yourself, “which lending tier am I realistically in right now? And am I comfortable with the tradeoffs?” Now that you understand the nuance, you can make an informed decision about your money…
Go with a higher cost alternative lender, or spend more time improving your credit to qualify for prime.
