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Subprime Mortgage
Usually, when an individual has a low credit score, accessing loans and mortgages becomes very difficult.
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What is a Subprime Mortgage?
Everybody deserves a place they can call home. Unfortunately, not everyone can qualify for a mortgage loan with Canada’s major banks or ‘A’ lenders. There are many reasons why ‘A’ lenders could reject a mortgage application, but the main reason is usually the borrower’s credit score, or that their income is insufficient to qualify for a loan.
These rejected applications are then considered to be subprime. However, it does not mean that owning a home is no longer possible for these applicants. They can still turn to a subprime lender or ‘B’ lenders.
While a subprime mortgage in Canada is gaining traction, it’s important to know all the factors involved before making such a big financial decision.
Understanding a Subprime Mortgage
A subprime mortgage is a loan issued to those at a higher risk of defaulting on the loan, whereas a prime mortgage is given to good payers or those with higher credit scores.
“Subprime” refers to applicants with bad credit scores. In 2020, the Canada Mortgage and Housing Corporation (CMHC) raised the minimum credit score requirement from 600 to 680, and if you’re looking for a loan with a score below this, you’ll have to connect with a B lender.
The 2008 financial crisis gave subprime mortgages a bad reputation in the eyes of both the media and consumers and led to one of the worst recessions in US history.
Fortunately, subprime mortgages in Canada didn’t catch on the way they did in the US. They exist, but a subprime mortgage in Toronto or Canada is too highly regulated to cause the same issues.
Benefits of Subprime Mortgages
Subprime mortgages have many associated benefits, making them a good option for some people. These benefits include:
- A Chance at Homeownership – Subprime loans are a great way to buy a home without building or repairing your credit or waiting to be approved for a prime mortgage.
- Helps Boost One’s Credit Score – The most important thing in building a solid credit score is to make on-time payments on any loan. Paying your subprime mortgage on time will help you build a good payment history.
- Easier to Get Approval
– A subprime mortgage provides greater flexibility in terms of criteria versus prime mortgages, giving aspiring homebuyers a higher chance of approval.
- Risks of Subprime Mortgages – Before taking a loan, keep in mind that lenders of subprime mortgages are way more cautious owing to the increased risk and have amended loan terms at the borrower’s expense.
- Higher Closing Fees and Associated Costs – Because subprime customers have a higher chance of defaulting on their loans, lenders charge higher interest rates and upfront costs to protect themselves. This also means your monthly payments get higher.
- May Have Longer Terms – Conventional mortgages are typically due in 15 to 30 years, while some subprime mortgages can extend repayment to 40 or 50 years. This means you could be repaying your whole life while paying more interest.
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Who Qualifies for a Subprime Loan?
While the criteria for a subprime loan are laxer than a prime loan, there are still qualifications to get a subprime mortgage in Canada and a subprime mortgage in Toronto. First, you must be a Canadian resident and have the documentation to prove it. Next, your credit score needs to be somewhat fair, or around 560-659.
Subprime mortgages are usually for individuals with low credit ratings or incomes, but there are other reasons someone may turn to a subprime lender.
People with unusual occupations, such as freelancers or commission-based professionals, may also be turned down by A lenders due to unstable income or inability to submit standardized pay slips.
Requirements for Subprime Mortgage Approval
Applying for a subprime mortgage is similar to a conventional mortgage. You will be required to show documentation as proof that you can handle the payments, such as:
- Valid proof of income or employment
- Banks statements and other financial documents to show assets and liabilities
- Income tax returns, T4 slips, or notice of assessments
- Details on the property you plan to purchase
- Down payment
- 2 Valid Identification (Drivers License, Passport, Social Insurance Number, etc.)
Types of Subprime Mortgages
Like other loans, you are provided with different options regarding rate, amortization, term, and more. Here are the top 3 options:
Fixed-rate –
This is a loan where the interest rate and monthly payments stay the same for the mortgage duration. You won’t have to worry even if the prime lending rate increases since your rate is the same until you renew. These can last up to 40 to 50 years.
Variable-rate –
Some people can get lower interest rates by getting variable-rate mortgages. The interest rate adapts to a benchmark, such as the prime interest rate, which means that rates may fluctuate over time while monthly payments stay unchanged.
These also usually have shorter amortization terms, usually a max of 30 years.
Interest-only –
You pay only the interest on the loan for a set time. The benefit is that the first payments are less expensive because you don’t have to pay back the principal. However, monthly payments may increase significantly once the introductory period expires.
Banks Won’t Help, But We Can
Are you self-employed, getting rejected by banks, or have had late payments, resulting in a low credit score? Despite what you may have heard, bad credit scores shouldn't stop you from buying a house.
Our goal here at Certified Mortgage Brokers is to help people in your situation navigate these financial obstacles so you can move into your dream home as soon as possible.
Our team of brokers can help you get accepted for a subprime mortgage in Canada and a subprime mortgage in Toronto, thanks to their extensive network and years of expertise.
