The Benefits of Getting a Mortgage With Bad Credit in Canada
Published September 5th 2022
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Plenty of Canadians have a credit score lower than 600, meaning they may not qualify for a mortgage from many lenders. Because of this, they may feel like they won't be able to buy a home until they improve their credit score, which may take upwards of six months.
But if you're struggling with poor credit and you're on the fence about buying a home without a high credit score, you have more options than you might think. Keep reading to find out about the benefits of subprime mortgages and how you might borrow one.
What's a Subprime Mortgage?
Subprime mortgages, also known as mortgage loans from B lenders, are for borrowers who have bad credit or those with lower income than they need to qualify for a loan from an A lender. Generally, the credit score range that disqualifies one from a prime mortgage loan is anywhere from 630-650 and above, as it varies depending on the particular lending company and other factors.
A bad credit mortgage may come in three different forms, which are fixed-rate, variable-rate, and interest-only. As the names suggest, these differ mainly in the interest rate and whether or not it fluctuates if the prime lending rate changes.
Fixed-rate mortgages are offered at a longer year term than standard mortgages and by doing so lower the borrower’s monthly payment. These loans come with an interest rate based on the prime lending rate at the time of the loan and therefore won’t increase even if the prime lending rate does. However, the initial rate is higher than a standard loan.
Variable-rate loans have two advantages over fixed-rate mortgages: the interest rate is initially lower and they’re available for shorter payment terms more in line with traditional loans. These have the double-edged sword of the possibility of the interest rate going down when the prime lending rate does along with your monthly payment, but the opposite is also true.
Interest-only mortgages are designed to be very short-term loans where, for the term of the loan, the borrower only pays the interest. These terms can be anywhere from 5-10 years after which the borrower either begins to repay the principal on the loan. If you're looking for a short-term solution or waiting on a promotion to improve your income, this can be a potential option.
Benefits of Bad Credit Mortgages
There are multiple benefits to a subprime mortgage aside from being available to those who have lower credit scores. But these benefits come with their own risks, so be sure to continue your research and find the best mortgage loan option for you.
They're A Good Option for Self-employed Individuals
The biggest benefit to subprime mortgages is that they allow those who are self-employed or independent contractors to get a home loan. As their income may fluctuate from month to month or contract to contract, they benefit from subprime mortgages that don’t rely on having a fixed stable income or a catalog of paystubs like traditional mortgages. Some borrowers may choose to opt for a stated income mortgage, where a lender doesn’t verify the borrower’s income in exchange for a larger down payment and mortgage insurance if necessary.
They Can Help Those With Previous Financial Issues
For those with previous financial issues, especially bankruptcy, home ownership can seem impossible. This is because banks generally don’t finance loans for those who have declared bankruptcy in the past two years.
However to qualify, one needs to have been discharged from bankruptcy for anywhere from 3 to 12 months depending on the lender. Depending on the province, there may be specifics surrounding the loan-to-value ratio and total debt-to-service ratio that you’ll be required to have to borrow.
An Option for People With Large Amounts of Debt
People with high debt-to-income ratios tend to have a difficult time buying a home. If the amount of debt one has is too high compared to their income, which is typically 36% although it may be as high as 44%, then they’ll be unable to qualify for a standard mortgage.
Subprime mortgages may have maximum debt-to-income ratios of 50% or more, so those looking to get a home with large amounts of debt may still have a chance. If you're looking to settle down even with a high amount of debt, a loan from a B lender can help.
Find Out if a Subprime Mortgage Is Right for You
For many prospective home buyers in Canada with bad credit, getting a mortgage can seem like a far-off goal. But a subprime mortgage loan can be the start of a new chapter with a better quality of life. If you're considering getting a home loan with bad credit, find out the qualifications and restrictions in your province to find out if a subprime mortgage may be for you.