Understanding Mortgages Post-Bankruptcy in Canada
One of the prevalent myths about bankruptcy is that it permanently bars you from securing a mortgage. However, this is far from the truth. It’s entirely possible to obtain a mortgage after bankruptcy discharge in Canada, although the precise timing may depend on individual lenders’ policies. In many cases, you could be eligible for a mortgage within 1.5 to 2 years following your discharge date. Some lenders might even consider your application sooner.
In this comprehensive guide, we’ll delve into the impact of bankruptcy on existing mortgages and future mortgage approvals. We’ll also explore the eligibility criteria you need to meet post-bankruptcy and offer tips on re-establishing your credit.
How Bankruptcy Influences Your Current Mortgage
It’s important to understand that declaring bankruptcy doesn’t directly affect your mortgage. This is because bankruptcy primarily deals with unsecured debts, such as credit cards and payday loans. A mortgage is a type of secured loan, which means the lender has a collateral – your home, in this case.
While bankruptcy won’t nullify your mortgage, it does allow you to retain your home. The Bankruptcy and Insolvency Act safeguards your property from repossession by the mortgage lender simply because you’ve declared bankruptcy. The lender can only repossess if you default on your mortgage payments.
You may need to pay a portion of your home equity to settle your debts, depending on your province and the equity your property holds. For instance, in Ontario, up to $10,783 of home equity is exempt, meaning it’s inaccessible to your creditors. However, if your home equity exceeds this limit, your Licensed Insolvency Trustee may require you to pay the full equity, allowing you to retain your home and continue paying your mortgage.
The Impact of Bankruptcy on Mortgage Renewal
If your mortgage term ends during bankruptcy, your lender might allow you to renew your contract, but this is dependent on individual lenders’ policies. Generally, lenders prefer to renew your mortgage rather than foreclose on your home, which would result in a loss of future interest revenue.
Your mortgage lender will likely only refuse renewal if they perceive the risk of default to be excessively high. If you maintain consistent payments throughout bankruptcy, you should have no difficulty renewing your mortgage.
Applying for a Mortgage Post-Bankruptcy
It’s possible to secure a mortgage 1.5 to 2 years after your discharge date. This waiting period is the standard for a conventional mortgage or one insured by the Canada Mortgage and Housing Corporation (CMHC).
Lenders may view you as a lower risk borrower post-bankruptcy, as your debts have been eliminated, reducing the likelihood of mortgage payment default. Additionally, you may have become more financially responsible, having completed credit counselling. Of course, obtaining a mortgage is contingent on rebuilding your credit.
Types of Mortgages You Can Qualify for After Bankruptcy
Following your bankruptcy discharge, you can apply for a range of mortgages. However, not all lenders may approve your application. Several factors, including your credit score, income, assets, down payment size, gross debt service ratio (GDS), total debt service ratio (GDS), and your bankruptcy discharge date, will influence your eligibility.
Prime Lenders
Prime lenders are reputable financial institutions such as the Big Five banks. They specialize in conventional or CMHC-insured mortgages and offer competitive interest rates. However, they maintain high application standards.
You’ll need to wait at least two years after your bankruptcy discharge date to qualify for financing. Additionally, you must have built up a one-year track record of positive credit history on at least two loan products (i.e., no late payments). You’ll also need to meet other baseline eligibility criteria.
Subprime Lenders
Subprime mortgage lenders cater to borrowers who don’t qualify for conventional or CMHC-insured mortgages. You could be eligible for a subprime mortgage within three months to a year following your bankruptcy. Though their eligibility criteria are less stringent, subprime lenders charge higher interest rates than prime lenders.
Private Lenders
You could secure a mortgage through a private lender immediately after your bankruptcy discharge. Private lenders have relaxed lending standards, making them a convenient financing source if you have bad credit but wish to purchase a home promptly. However, many risks come with applying for a loan through a private mortgage lender.
Tips for Securing a Mortgage After Bankruptcy
Bankruptcy may temporarily hinder your ability to get a mortgage. However, improving your credit standing will increase your chances of securing a mortgage. Here are some strategies to boost your credit score:
- Obtain a secured credit card.
- Apply for a credit-builder loan.
- Become an authorized user on someone’s credit card account.
- Pay all your bills on time.
- Keep your credit utilization low.
- Always pay the minimum payment on your credit card.
With diligence and patience, you could be in a position to purchase a home within as little as two years.
If you’re worried about the impact of bankruptcy on your ability to get a mortgage, consider booking a free consultation with Bankruptcy Canada. As Licensed Insolvency Trustees with over two decades of experience, they can guide you through the bankruptcy process and help you rebuild your credit in the shortest time possible.
Take the first step towards a debt-free life today.
