The Impact of a Consumer Proposal on Your Mortgage Renewal
Financial difficulties can arise unexpectedly, leaving you with no choice but to seek debt relief methods such as filing a consumer proposal. One of the most common concerns during this process is: will a consumer proposal affect my mortgage renewal? In this comprehensive guide, we delve into this matter, shedding light on how a consumer proposal may impact your mortgage renewal and offering practical solutions.
What is a Consumer Proposal?
A consumer proposal is a formal, legally binding process that allows you to negotiate a settlement with your creditors. This process is administered by a Licensed Insolvency Trustee (LIT), who works with you to develop a proposal—an offer to pay creditors a percentage of what is owed to them or extend the time to pay off the debts, or both.
The Correlation Between a Consumer Proposal and Your Credit
Upon filing a consumer proposal, you communicate to your creditors that you are unable to fulfill your debt obligations. While it may not completely “ruin” your credit, it is likely to negatively impact your credit score.
However, it’s essential to remember that simply ignoring your debt obligations and failing to make payments will also have a similar, if not more severe, effect on your credit score. Filing a consumer proposal often results in an R7 credit rating, which, while not ideal, may be a preferable outcome than defaulting on your payments altogether.
The Effect of a Consumer Proposal on Your Home
The good news is that filing a consumer proposal does not mean you will lose your home. Unlike bankruptcy, where assets may be sold to repay creditors, a consumer proposal allows you to keep your assets, including your house.
Furthermore, any equity in your home can be considered in the negotiations with your creditors. Once the consumer proposal is approved, you can maintain ownership of your home while repaying your creditors an agreed-upon amount over a specified period.
Can I Buy a House After Filing a Consumer Proposal?
Contrary to popular belief, filing a consumer proposal does not bar you from becoming a homeowner. Although your proposal remains on your credit report for three years after the final payment of the agreement, you can still take steps to improve your credit and increase your chances of qualifying for a mortgage.
Much like any mortgage application, your chances of approval are higher if you have a good credit score, a substantial down payment (20% or higher), and a reliable income.
The Relationship Between a Consumer Proposal and Your Mortgage
Filing a consumer proposal can be a strategic move if you are struggling to manage your debts. It allows you to negotiate the terms of your debt repayment, easing the financial strain on you and your family.
While a consumer proposal does affect your credit rating, it does not necessarily ruin your chances of securing a mortgage or buying a new home. Moreover, your mortgage lender cannot alter the terms of your mortgage simply because you filed a consumer proposal—this can only happen if you default on your payments.
Qualifying for a Mortgage After a Consumer Proposal
A consumer proposal provides you with the flexibility to reduce your debt, adjust your monthly debt payments, and/or extend the payment period. With this added flexibility, it is advisable to create a budget, start building up your savings, and focus on paying your bills in full and on time to improve your credit score.
To qualify for a prime quality mortgage, lenders will consider the following factors:
- Improvement in your credit rating after the completion of your consumer proposal
- Establishment of new credit facilities, such as a new card or line of credit
- The amount you have saved for the down payment of your new property
The Role of a Spouse’s Credit
If your spouse has good credit, they may be able to apply for a mortgage loan and add you as a co-signer. This can be a viable option if you aren’t able to improve your credit to a qualifying level before you plan on applying for a mortgage. Also, if you are already a homeowner, your mortgage will not be affected as long as you continue making your payments – whether you filed for the consumer proposal yourself or alongside your spouse.
Will a Consumer Proposal Affect My Mortgage Renewal?
As long as you have been making your mortgage payments in full and on-time, you should be able to renew your mortgage with your existing lender, even if you have filed a consumer proposal. Your existing lender is unlikely to require a new credit application for mortgage renewal.
However, if you switch lenders, you will need to file a new credit application. Bear in mind that filing a consumer proposal can impact your credit rating, affecting your chances of securing the best rates. Therefore, it is recommended to strive to improve your credit by paying off your debts diligently.
Conclusion
The prospect of will a consumer proposal affect my mortgage renewal can be daunting. However, with careful planning, sound financial decisions, and a commitment to improving your credit, you can navigate through this situation and secure a mortgage renewal.
If you have more questions about how a consumer proposal affects your home or mortgage, consider reaching out to a debt relief professional to determine whether filing a consumer proposal is the right debt relief option for you.
