How to Get Approved for a Mortgage in Canada — Even with Debt and a Low Credit Score

Apr 23

How to Get Approved for a Mortgage in Canada — Even with Debt and a Low Credit Score

Dreaming of owning your own place, but your credit score isn’t where you want it to be—and you’ve got some debt tagging along for the ride? You're not alone, and better yet, you're not out of the running for a mortgage in Canada. While banks may raise an eyebrow at a low score or high debt, there are still options out there for you. Let’s break down how to make it happen.

1. Check Your Credit (and Understand It)

In Canada, credit scores range from 300 to 900, and lenders typically like to see at least 620. That said, some alternative lenders will work with scores in the 500s.

Use services like Borrowell, Credit Karma, or Equifax Canada to check your score.
Pull your full credit report (free from Equifax or TransUnion Canada once a year).
Understand your debt-to-income (DTI) ratio—lenders want to know if you can handle more debt.

2. Improve Your Score While You Prep

Even modest improvements in your credit score can help unlock better rates.

Pay all bills on time, especially credit cards, lines of credit, or loans.
Lower your credit utilization—ideally under 30% of your available credit.
Avoid applying for new credit before your mortgage application.
Dispute errors on your credit report. Mistakes happen!

3. Bump Up Your Down Payment

The minimum down payment in Canada is:

5% for homes under $500,000
10% for any amount above $500,000 up to $999,999
20% for homes $1 million and up

If your credit is weak, consider saving more than the minimum. A bigger down payment can offset the risk for lenders and even help you avoid high-ratio mortgage insurance premiums.

4. Explore Alternative Lenders

Big banks may be strict, but Canada has a strong alternative lending market:

B lenders (like Home Trust or Equitable Bank) work with borrowers who have bruised credit.
Private lenders can help short-term, especially if you're rebuilding your financial profile.

Keep in mind: these often come with higher interest rates and shorter terms.

5. Government Programs Can Help

Canada offers several options to help first-time buyers:

First-Time Home Buyer Incentive (FTHBI): The government shares up to 10% of your home’s cost to reduce your mortgage amount.
Home Buyers' Plan (HBP): Withdraw up to $60,000 from your RRSP (as of 2024) tax-free for a down payment.
CMHC-insured mortgages can allow buyers with scores as low as 600, but you’ll pay insurance premiums.

6. Get a Mortgage Broker on Your Side

A licensed mortgage broker in Canada has access to a wide range of lenders, including B lenders and credit unions. They’ll shop around for the best deal that fits your situation—even if your credit isn’t stellar.

They can also advise if now’s the right time to apply—or if waiting and improving your credit for a few months could save you thousands.

7. Consider a Co-Signer or Joint Application

If a family member or partner has strong credit and steady income, a co-signer could boost your approval odds significantly. Just make sure everyone understands the risks and responsibilities.

8. Write a Letter of Explanation

Lenders in Canada might ask for a Letter of Explanation (LoE) if they see credit issues, missed payments, or irregularities. Be honest, clear, and explain what happened—and what’s changed.

Final Thoughts

Buying a home in Canada with debt and a low credit score isn’t easy—but it’s 100% possible. The keys? Know your numbers, explore all options, and be patient with the process. Homeownership isn’t just for the debt-free and perfect-score crowd. It’s for determined folks who are ready to play it smart.

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