Low or Damaged Credit: Getting a Mortgage in Canada

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Getting a Mortgage With Low or Damaged Credit

A damaged credit history does not mean the end of your homeownership plans. In Canada, the mortgage market is structured into three lender categories, each with different eligibility criteria. Understanding this hierarchy is essential to identifying realistic options and developing a strategy tailored to your financial situation.

The Three Lender Categories in Canada

A-Lenders: Major Canadian banks (Royal Bank, TD, BMO, National Bank, Desjardins, etc.) and leading monoline lenders. They offer the most competitive rates but generally require a credit score of 680+, a gross debt service (GDS) ratio below 39%, and a total debt service (TDS) ratio below 44%.

B-Lenders: Institutions such as Equitable Bank, Home Trust, ICICI Bank, First National (Alt-A), and other regulated alternative lenders. They accept credit scores between 500 and 650, slightly higher debt ratios, and non-traditional employment situations. Rates are 0.5% to 2% higher than A-lenders.

Private Lenders: Individual investors or mortgage investment corporations (MICs) that lend based on property value rather than the borrower's credit. Rates range from 7% to 15%, with origination fees of 1% to 3%. These loans are generally short-term (1 to 3 years) and serve as a transitional solution.

Why Credit Becomes Low or Damaged

Late payments of 30 days or more on credit cards, loans, or lines of credit, recorded on file for 6 to 7 years.
High credit utilization: a balance above 75% of the available limit significantly reduces the score.
Accounts sent to collections or unpaid judgments.
Consumer proposal or bankruptcy, which remain on file for 6 to 7 years (or 14 years for a second bankruptcy).
Too many credit inquiries (hard pulls) within a short period.
Errors on the credit report not corrected with Equifax or TransUnion Canada.

Typical Conditions From Alternative Lenders

B-lenders and private lenders impose stricter conditions to compensate for the increased risk. The minimum down payment is generally 20% or more, as mortgage insurance from CMHC, Sagen, or Canada Guaranty is typically unavailable for borrowers with scores below 600. Origination fees (lender fees) range from 0.5% to 1% with B-lenders and 1% to 3% with private lenders. Some private lenders also charge additional brokerage fees. The term is often shorter (1 to 2 years with private lenders) with the goal of allowing the borrower to rebuild credit and qualify with an A-lender or B-lender at renewal.

Credit Rehabilitation Strategy to Access Better Rates

Obtain and analyze your credit report: Request your free report from Equifax and TransUnion Canada. Verify the accuracy of all entries and dispute errors directly with the agencies. Approximately 20% of credit reports contain significant errors.
Reduce credit utilization below 30%: Credit utilization accounts for approximately 30% of your score. Paying down credit card balances to below 30% of the approved limit can improve your score by 50 to 100 points within a few months.
Establish a track record of on-time payments: Payment history accounts for 35% of your credit score. Six to twelve months of on-time payments demonstrate a change in behaviour to lenders and credit agencies.
Consult an AMF-certified mortgage broker: The broker can assess your current situation, identify the optimal lender for your profile, and develop a rehabilitation plan with measurable milestones. Their services are generally free for the borrower on A-lender and B-lender loans.

Frequently Asked Questions

What minimum credit score do I need to get a mortgage in Canada?

A-lenders (major banks) generally require a score of 680 or higher for the most competitive rates. B-lenders accept scores between 500 and 650, while private lenders often impose no minimum credit score threshold, focusing instead on property value and down payment.

How much more does a mortgage cost with damaged credit?

With a B-lender, the rate is typically 0.5% to 2% higher than major bank rates. Origination fees of 0.5% to 1% of the loan may also apply. With a private lender, rates can reach 7% to 15%, with origination fees of 1% to 3%. On a $300,000 loan, the difference can amount to thousands of dollars per year.

Can I improve my credit score before applying for a mortgage?

Yes. The most effective actions include: paying down credit card balances to below 30% of the limit, making all payments on time for 6 to 12 months, correcting errors on your credit report with Equifax or TransUnion, and avoiding opening new credit accounts. An AMF-certified mortgage broker can help you develop a credit rehabilitation plan.

What down payment is required with low credit?

B-lenders generally require 20% or more down payment, as loans with less than 20% require mortgage insurance (CMHC, Sagen, or Canada Guaranty) which imposes its own credit score criteria (minimum 600-680). Private lenders may require 15% to 35% depending on the risk profile of the file.

Can a mortgage broker really help me if I have bad credit?

Absolutely. An AMF-certified broker has access to a vast network of lenders, including B-lenders and private lenders, that you would not have access to directly. They can evaluate your file, identify the best lender for your situation, and negotiate conditions. Additionally, they can advise you on steps to improve your score and eventually reposition you with an A-lender.