Can I Qualify for a Mortgage After Bankruptcy?

Can I Qualify for a Mortgage After Bankruptcy?

Securing Mortgage Approval Post-Bankruptcy: A Comprehensive Guide

The assumption that obtaining mortgage approval after filing for bankruptcy is an impossibility is a widespread misconception. This guide will debunk that myth and provide valuable insights into the mortgage approval process in the aftermath of bankruptcy, particularly focusing on the Canadian context.

Understanding Bankruptcy and Mortgage Approval

Bankruptcy is a legal procedure that provides relief to individuals overwhelmed by debts. However, it leaves a significant impact on the individual’s credit history, which can complicate their attempts to secure a mortgage. Nevertheless, it is important to understand that mortgage approval post-bankruptcy is not an impossibility. With strategic planning and patience, it is achievable.

Post-Bankruptcy: The Myth and Reality

The general belief that bankruptcy filers cannot secure a mortgage is primarily based on the fact that bankruptcy severely impacts an individual’s credit score. However, this does not mean that all hope is lost for these individuals to become homeowners. A considerable number of Canadians have successfully secured mortgage approval after bankruptcy, often in as little as two years post-discharge.

The key to achieving this lies in the meticulous rebuilding of one’s credit report, which can significantly enhance the chances of lenders approving their mortgage application. This can be achieved by focusing on improving your financial health once you’re discharged from bankruptcy.

The Role of Canada Mortgage and Housing Corporation

The Canada Mortgage and Housing Corporation (CMHC) plays a crucial role in the mortgage approval process post-bankruptcy. They typically review applications approximately 1.5 to 2 years post-bankruptcy discharge. This review can significantly ease the process of securing a mortgage for those who have previously filed for bankruptcy.

The Fate of Your Existing Mortgage

If you’re already a homeowner with a mortgage at the time of filing for bankruptcy, you may be concerned about the fate of your home. The good news is that it is possible to retain your property even after declaring bankruptcy.

Your Trustee’s Role

Your Licensed Insolvency Trustee will work with you on an assignment in bankruptcy before initiating the bankruptcy process. The trustee’s role is to maximize what is given to the creditors you owe money to. This often includes any property, provided it has equity.

Your Home’s Equity and Your Mortgage

If your property’s value equals what you owe on your mortgage, your bankruptcy trustee may allow you to retain your home and continue making payments. This means you can continue to have a mortgage post-bankruptcy. Similarly, if there is equity in your property, and you can afford to pay the value of the equity into your bankruptcy, you may also be able to keep your home.

Renewing Your Mortgage Post-Bankruptcy

If you’ve managed to maintain your mortgage throughout your bankruptcy, you might be wondering what happens when it’s time to renew your mortgage. Can you stay with the same bank, or do you need to switch lenders?

Mortgage Renewal and Lender Preference

Most banks would prefer you to renew your mortgage and continue to pay off the principal amount and interest, rather than foreclosing on your property. This is mainly because foreclosing could potentially cause them to lose future profits by selling the property at a reduced price.

So, as long as your mortgage payments are up-to-date, you should be able to renew your mortgage with your current lender post-bankruptcy.

How to Secure a Mortgage Post-Bankruptcy

Securing a mortgage post-bankruptcy can be a challenging task, but with the right strategies, it’s achievable. Here are some strategic actions you can take to enhance your chances:

Secure a Credit Card

After bankruptcy, obtaining a credit card is an excellent way to start rebuilding your credit. Secured credit cards are a viable option for individuals post-bankruptcy. These cards require an upfront security deposit equivalent to the credit limit or more in case of default. Repaying the balance in full and on time can help rebuild your credit score, which mortgage lenders consider during the application process.

Research and Preparation

While waiting to apply for your mortgage, you can work on other factors that will boost your application. These include ensuring a steady income, saving money, and looking for a property that doesn’t require a huge loan compared to its value. You should also consider the condition and value of the property and any other assets you may have that could support your mortgage application.

Timing Your Application

Mortgage lenders are usually hesitant to offer a mortgage immediately after bankruptcy. Therefore, most individuals wait until they’ve been discharged from bankruptcy for around two years. This waiting period can be utilized effectively to rebuild your credit and prepare your financial profile for a mortgage application.

Mortgage Options Post-Bankruptcy

There are various mortgage options available for individuals post-bankruptcy. The best one for you depends on when you were discharged from bankruptcy, your current credit score, the size of your down payment, and other financial factors.

Here are three main types of mortgages you may qualify for post-bankruptcy:

Traditional or Prime Insured Mortgage

A traditional mortgage offers the best rate. To qualify, you must have been discharged from bankruptcy for at least two years and have at least a year of reestablished credit. You must also have a down payment of 5% for the first $500,000 of your property purchase, and an additional 10% for anything beyond this amount.

Subprime Mortgage

A subprime mortgage is for individuals who may not qualify for a traditional mortgage. To secure a subprime mortgage, you must have been discharged from bankruptcy for a minimum of three months to a year.

Private Mortgage

A private mortgage can be secured from a private lender immediately after being discharged from bankruptcy. You don’t even need to have any reestablished credit. However, you will likely need a down payment of 15%, a full appraisal to share with the lender, and a lender commitment fee, typically 1% of the property value.

Wrapping Up

Bankruptcy and mortgage approval might seem like two contrasting terms, but with strategic planning and patience, it’s possible to secure mortgage approval even after filing for bankruptcy. By understanding how bankruptcy impacts your mortgage prospects and taking steps to rebuild your credit, you can pave the way to homeownership post-bankruptcy.

Remember, securing a mortgage post-bankruptcy is a journey. It requires time, discipline, and strategic financial planning. But with the right approach and guidance, it’s a journey that can lead to the successful realization of your homeownership dreams.

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