Buying a House After Bankruptcy

A Comprehensive Guide to Buying a House After Bankruptcy

Bankruptcy doesn’t necessarily spell the end of the road when it comes to owning a home. It’s a hurdle, yes, but one that can be overcome with proper planning and strategic financial decisions. This guide unravels the complexities of buying a house after bankruptcy and aims to put you on a path towards homeownership once again.

Is Homeownership Possible After Bankruptcy?

Indeed, it is. Interestingly enough, procuring a mortgage after bankruptcy might even be simpler than acquiring a credit card. The key factor here is the size of your down payment. The larger the deposit, the broader the range of options available to you.

Understanding CMHC Insurance

Mortgages are typically insured by the Central Mortgage and Housing Corporation (CMHC). Essentially, this means that if you default on your mortgage, the bank can claim the loss through the CMHC. However, certain conditions apply:

 

  • CMHC investigates if you’ve undergone a foreclosure. If you have, they may impose specific conditions for insuring your mortgage.
  • After being discharged from bankruptcy for two years or more (assuming no foreclosure during bankruptcy), CMHC assesses your ability to repay a mortgage. They determine your mortgage limit, allowing you to house hunt within that range.

 

Alternatives to Traditional Mortgages

Banks aren’t your sole option when seeking a mortgage. Depending on market conditions, you might have other avenues:

 

Vendor take-back mortgage: This is where the seller facilitates the sale by offering funds. It’s not a common occurrence, but not unheard of either.

Rent to own: In this arrangement, the seller rents you the house, and a portion of the rent goes towards buying the home. During the rental period, you can accumulate a down payment and eventually secure a traditional mortgage.

Conventional mortgage: This requires a down payment of 20% of the property value. With this sizable investment, banks are more likely to grant a mortgage without needing CMHC approval.

Post-Bankruptcy Evidence Required by Banks

Once you are discharged from bankruptcy, your Licensed Insolvency Trustee (LIT) issues a certificate of discharge. This document is crucial proof of your bankruptcy completion.

In case you misplace this certificate, you can obtain a replacement or a certificate from the superintendent of bankruptcy’s office (OSB). Alternatively, you could contact credit reporting companies like TransUnion or Equifax, which automatically receive information from the OSB about bankruptcies and discharges. However, this may involve a small fee.

Proof of Creditworthiness for Lenders

Remember, financial institutions are in the risk management business. They want to see proof that you’re no longer a credit risk. Here’s what lenders typically look for:

 

Credit history: How responsibly have you used credit since your discharge?

Employment status: Consistent employment is a positive sign. Generally, two years with the same employer is considered stable.

Financial management: How well do you manage your finances? Regular payments and good budgeting indicate responsible financial management.

Purpose of loan: Lenders look favorably at loans for appreciating assets, like a car or a house, as opposed to depreciating assets, such as a vacation.

 

Finance Companies as an Option

Finance companies, while often charging higher interest rates to offset their risk, are another source of loans. Avoid these if possible, as the high interest can significantly impact your repayment capability.

Impact of Bankruptcy on Down Payment Size

The size of your down payment can affect your credibility when applying for a mortgage. A larger down payment, such as 10% instead of the minimum 5%, can strengthen your position.

Planning Ahead

Before buying a house after bankruptcy, careful budgeting is crucial. Homeownership comes with significant expenses, such as property taxes and upkeep costs. Failing to account for these can result in becoming ‘house-poor’, where all your income goes towards maintaining the house, leaving little for other expenses.

Working with a Licensed Insolvency Trustee

A Licensed Insolvency Trustee can guide you on how to buy a home after bankruptcy, helping you avoid potential pitfalls and making the process smoother.

The Bottom Line

Bankruptcy is a significant setback, but it doesn’t mean an end to homeownership. With careful planning, financial discipline, and a clear understanding of the process, buying a house after bankruptcy is entirely feasible.

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Get in touch with us for a free consultation on how we can help you navigate your financial journey post-bankruptcy.

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