Embarking on a Home Loan Journey After Bankruptcy or Consumer Proposal

Individuals seeking guidance on “Getting a mortgage after a Bankruptcy or Consumer Proposal” have come to the right place. The aim is to provide readers with reliable information, although it is suggested to consult with a nearby mortgage professional for personalized advice.

Overview

A bankruptcy or consumer proposal may be a setback, but it doesn’t spell the end of your dreams to own a home. Even after undergoing such financial turbulence, you can still secure a mortgage with a minimum down payment of 5% in a relatively short span. However, the parameters and rules that may affect your loan eligibility should be thoroughly discussed with your local mortgage broker.

The 5% Down Payment Route

To become eligible for a mortgage with a 5% down payment, you must have passed two years from the discharge date and abide by the 2-2-2 Rule for established credit. This rule implies having two credit lines for two years, each with a limit of $2,000 or more.

Ensure no payment delays post your bankruptcy, as any missed payments could terminate your chances of securing a mortgage. If you have missed any payments, you might need to wait till your bankruptcy record is removed from your credit bureau, which takes six years for the first bankruptcy and 14 years for the second.

You can check your credit score and history at Equifax and Transunion.

When a Higher Down Payment Becomes Inevitable

If you fail to meet the above criteria, you must be prepared to make a down payment of at least 20% of the purchase price. In extreme cases, the down payment could go up to 35%. Moreover, you might need to approach an alternative lender.

Special Circumstances

Certain special circumstances might affect your ability to secure a mortgage, even if you comply with the aforementioned criteria.

The Case of Double Bankruptcy

If you have faced bankruptcy twice, you need to make a 20% down payment or wait for 14 years post the discharge date for the bankruptcy record to be removed from your credit bureau.

A House Included In Bankruptcy

In situations where a house was part of the bankruptcy, you can still aim for a 5% down payment. However, potential lenders might subject your case to a higher level of scrutiny. This could mean a longer waiting period, or the need for new credit lines that have been established for a much longer duration. Such situations are dealt with on a case-by-case basis, considering all aspects of the transaction.

Credit Score: A Crucial Factor for Mortgage Approval

Credit score plays a vital role in securing a mortgage. It’s a parameter that can’t be altered overnight. Lenders focus on two aspects of your credit: your credit score and credit history. A robust credit score could still lead to a mortgage rejection if you lack a substantial credit history. Most lenders refer to the FICO credit score from Equifax. Here’s a breakdown of different credit score levels:

680+

Holding a score of 680 or more opens doors to almost every lender in the market, and you could qualify for a larger loan amount as the debt servicing ratios can be extended (GDS and TDS ratios will be at 39% and 44%, respectively).

 

GDS is the percentage of your housing costs relative to income, and TDS is the percentage of your housing costs + other debts relative to income.

 

650+

A score of 650 or more is the bare minimum if you are planning for a $0-down mortgage or planning to borrow funds from a line of credit or credit card for a down payment. The GDS and TDS ratios are reduced to 35% and 42%, respectively.

600+

A score of 600 or more is the minimum requirement for a 5% down payment. The GDS and TDS ratios for such a scenario would be 35% and 42%, respectively.

500+

With a score in this range, you will need to make a down payment of at least 20% and you might need to resort to an alternative lender, or possibly even a private lender.

<500

A score lesser than 500 implies a hefty down payment of up to 35% through either a private lender or an alternative lender. Unlike banks, private lenders and alternative lenders are usually only accessible through a mortgage broker.

Quick Tips to Boost Your Credit Score

A quick and effective way to improve your credit score is by reducing your credit utilization. Credit utilization refers to the percentage of your credit line that is actively in use. Lower utilization is always preferred. If your credit card has a limit of $1,000 and you currently owe $900, then your utilization is 90% since you’ve consumed nearly all of your available credit.

Credit utilization is crucial when it comes to revolving credit lines, like credit cards and lines of credit, which can be actively drawn down and paid back at any time. Around 35% of your credit score is determined by utilization. If your credit lines are utilized more than 50%, it can negatively impact your score. Reducing utilization is the fastest way to enhance your credit score.

Understanding Credit History

Your credit score isn’t the only deciding factor. A credit score above 650 can still result in a mortgage rejection due to inadequate credit history. For an established credit history, stick to the “2-2-2 Rule” (2 credit lines, 2 years of history, with a limit of $2,000 or more on each). In case of variations, a lender will typically approve an application.

For instance, you might have only one credit card with a limit of $5,000, which you’ve had for over two years. If these requirements can’t be met, you might need to make a down payment of at least 20% and face higher interest rates through an alternative lender.

Conclusion: Getting a Mortgage After Bankruptcy or Consumer Proposal is Achievable

Securing a mortgage post-bankruptcy or consumer proposal is feasible but requires dedicated effort. This article primarily focuses on acquiring a standard family home in an urban area. However, factors like living in a rural area or aiming to purchase a mini-home, cottage, or rental property can influence your eligibility to qualify. Every situation is unique and varies, so it’s highly recommended to consult with a mortgage professional.

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