Securing a Home Loan Post-Bankruptcy: A Comprehensive Guide
Filing for bankruptcy doesn’t have to mean the end of your dream of owning a home. It may seem like a daunting task, but with the right guidance and planning, securing a mortgage post-bankruptcy is achievable.
The Possibility of a Mortgage with Just 5% Down Payment
Even after going through bankruptcy or consumer proposal, acquiring a mortgage with a down payment as low as 5% is feasible within a reasonably short period. However, to qualify for this, certain conditions must be met. These include:
- Being two years past the discharge date.
- Meeting the 2-2-2 Rule for established credit, i.e., maintaining two lines of credit, with a length of two years and a limit of $2,000 or more on each line.
- Ensuring no missed payments post-bankruptcy, as this reflects negatively on your financial responsibility.
If you have missed payments, you’ll need to wait until bankruptcy is removed from your credit bureau report – six years for the first bankruptcy and 14 years for the second. You can obtain your credit score and history from Equifax or Transunion.
Scenarios Requiring Larger Down Payments
If the criteria mentioned above are not met, a higher down payment – possibly as high as 35% of the purchase price – may be required. You may also need to approach an alternative lender in such cases.
Significant Factors to Consider
Several unique circumstances can affect your ability to secure a mortgage, even if you meet the basic criteria. These include:
Impact of Multiple Bankruptcies
If you’ve filed for bankruptcy more than once, you’ll need to wait 14 years after the discharge date (when it is removed from your credit bureau) or make a down payment of 20%.
Inclusion of Property in Bankruptcy
If a property was involved in the bankruptcy, you can still make a down payment as low as 5%. However, potential lenders may require a longer waiting period or newly-established credit lines. It’s best to consult a local mortgage broker to understand these nuances.
Decoding the Good Credit Score for Mortgage
Credit score and history are pivotal when applying for a mortgage. Lenders primarily use the FICO credit score from Equifax. Here’s what different score ranges mean:
680 and above
Scores in this range provide access to almost every lender in the market. It also allows you to qualify for a larger loan amount with extended debt servicing ratios.
650 and above
This is the minimum credit score for a $0-down mortgage or to borrow funds for a down payment from a line of credit or credit card.
600 and above
This is the minimum score for a 5% down payment.
500 and above
A down payment of at least 20% will be required in this scenario, and you may have to approach an alternative or private lender.
Below 500
Expect high down payments through either an alternative lender or a private lender.
Steps to Enhance Your Credit Score Swiftly
Reducing your credit utilization rate is one of the quickest ways to improve your credit score. For instance, if you have a credit limit of $1000 and a balance of $900, your utilization rate is 90%. Lowering this percentage can significantly boost your score.
Understanding Credit History
Even if your credit score is above 650, you could still be declined for a mortgage due to insufficient credit history. Maintain at least two lines of credit with a history of two years and a limit of $2000 or more on each line (the “2-2-2 Rule”) for approval from most lenders.
Conclusion: The Feasibility of Mortgage after Bankruptcy
While getting a mortgage after bankruptcy requires effort, it is possible. Various factors, including your location and the type of property you’re purchasing, can impact your ability to qualify. It’s always best to consult with a mortgage professional to understand your unique circumstances.
