Debt Relief Experts
Declaring bankruptcy can seem like a big obstacle to buying a home. However, getting a mortgage after bankruptcy is possible with the right approach and patience. This guide will walk you through the steps to rebuild your credit and qualify for a mortgage post-bankruptcy in Canada.
Table of Contents
Minimum Credit Requirements and Timeline
Your credit rating will not be high after filing bankruptcy (but chances are, it wasn’t high before you filed). A bankruptcy remains on your credit report for six years after the discharge date, although you do not have to wait this long to apply for a mortgage.
The key is to work to re-establish bad credit before taking on a mortgage. This process takes roughly two years after your bankruptcy discharge.
To be approved for a prime quality mortgage post-bankruptcy, traditional lenders are looking for a minimum of:
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2-year timeline after discharge over which you have re-established your credit history;
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2 or more new credit facilities (credit cards, lines of credit, term loans); and
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approximately $3000 credit limit
This shows mortgage lenders that you can responsibly manage a higher credit limit and prove you are no longer a high credit risk.
Rebuilding Your Credit
You have two goals when rebuilding your credit after bankruptcy or consumer proposal if you want to get a mortgage:
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Establish enough credit lines that show mortgage lenders you can handle a higher credit limit
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Manage that credit in a way that the credit bureau algorithms will increase your credit score
Types of Debt To Use
Lenders want to see regular payments on larger revolving, unsecured credit or term loans.
You can use a secured credit card to establish your credit initially, but this is not enough to qualify for a mortgage.
You will need to graduate to something like a Canadian Tire Mastercard or other easy-access consumer credit card and eventually into more traditional lending products such as a small bank Visa, MasterCard, line of credit, or car loan.
We do not recommend credit rebuilder loans. These types of credit repair programs are costly and don’t do much you can’t do on your own.
Understanding Credit Scores
Credit bureaus like Equifax and TransUnion are looking for you to pay on time, every time, and keep your credit utilization rate low.
That means using your cards by making small purchases but paying off the balance in full every month. Keep the average balance on your card to no more than 30% of your credit limit.
The credit bureaus don’t track how much you spend; they know you pay on time, every time, and use less credit than your limit, which gives you a better credit rating.
Five Steps to Credit Repair
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Get a copy of your credit report
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Fix all errors on your report, including checking that the date of your bankruptcy discharge is reflected accurately
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Pay bills on time, including phone bills, credit cards and any other tradelines
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Establish two new trade lines, but take it slowly
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Use those accounts wisely, including keeping utilization rates low
Continue to do this for the two-year waiting period required by most mortgage lenders, and your score should increase to 700, the typical minimum credit score expected by most traditional lenders.
Getting Mortgage-Ready
Do I Need A Larger Down Payment?
While a mortgage is possible with a 5% down payment, this will require mortgage insurance. However, you cannot qualify for CMHC insurance until two years after your bankruptcy discharge.
There are several benefits of a larger down payment:
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The higher your downpayment, the less you are asking to borrow and the higher your home equity. A lower loan-to-value ratio can increase your chances of approval and help you qualify for better interest rates.
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With a 20% or more down payment, you avoid mortgage default insurance premiums, which can add thousands to your mortgage.
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The larger your down payment, the lower your monthly mortgage payment, which can help you manage your budget better.
Although 5% down sounds tempting, we strongly advise saving up as much as possible to build a better foundation for homeownership. Any down payment below 20% is generally considered a high-risk mortgage and brings the risk of default. Consider buying a smaller house to maximize the down payment you can save. Much like credit card debt, where paying the minimum is a bad idea, paying the minimum down payment costs too much in the long run.
Working With a Mortgage Professional
Homebuyers can consider working with a mortgage broker with experience in mortgage applications after a bankruptcy. They can assess your situation, provide a realistic timeline for mortgage approval, and connect you with lenders specializing in post-bankruptcy mortgages.
While traditional banks may be hesitant to lend immediately after bankruptcy, mortgage brokers can help you explore other mortgage loan options in Canada:
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B-Lenders: These alternative lenders may offer mortgages sooner after bankruptcy, but often at higher interest rates.
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Private Lenders: As a last resort, a private mortgage may offer less stringent requirements, but usually at much higher rates and fees.
Should I Consider a Co-Signer
Having a cosigner with strong credit can improve your chances of approval and potentially help you secure better rates. However, it’s crucial to understand the risks for the co-signer:
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The co-signer is equally responsible for the mortgage payments
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If you default, their credit score will be negatively impacted
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They may have difficulty qualifying for their own loans or mortgages due to this additional debt obligation
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In case of default, the lender can pursue the co-signer for payment, potentially putting their assets at risk
Given these risks, both you and the potential co-signer should carefully consider this option and have a clear agreement in place.
Remember, rebuilding credit and qualifying for a mortgage after bankruptcy takes time. Stay focused on your financial goals, maintain good credit habits, and be patient with the process. With persistence and responsible financial management, you can overcome the challenges of post-bankruptcy mortgage approval and achieve your goal of homeownership.
If you’re struggling with debt and considering bankruptcy or other debt relief options, it’s important to seek professional advice. Contact Hoyes Michalos for a free consultation to discuss your financial situation and explore the best path forward for your future financial stability.
