Can I Qualify for a Mortgage After Filing for Bankruptcy?
Owning a home is a very common dream for many individuals and families in BC—however, many Canadians believe that filing for bankruptcy will crush that dream of being a homeowner and make it impossible to ever get a mortgage in the future. They fear that using legal debt solutions like a consumer proposal or personal bankruptcy means sacrificing their major financial goals. But that couldn’t be further from the truth.
If you’re debating whether it’s “worth it” to lower your credit score to eliminate your total debt, you need to understand that the impact on your credit rating is only temporary and you will be able to move forward with a fresh start. In fact, filing a Consumer Proposal or personal bankruptcy can be an important step in achieving your future financial goals like owning a home, saving for your children’s education, and retiring comfortably.
Let’s get started with the first question that every client asks our Debt Advisors when they first sit down to discuss their debt relief options.
What is the impact on my credit score if I file a Consumer Proposal or declare bankruptcy?
Both a Consumer Proposal and personal bankruptcy have different implications on your credit score:
Consumer Proposals and Credit Score
A Consumer Proposal allows you to propose an alternative repayment plan to your creditors. Your Licensed Insolvency Trustee will negotiate your debt down to a fraction of what you owe, which you pay back in one manageable, interest-free monthly payment.
A Consumer Proposal will be noted on your credit report for three years after completion of your proposal or six years from the date of filing, whichever comes first.
Personal Bankruptcy and Credit Score
Filing for personal bankruptcy is another debt-relief option that helps you find relief from your financial burdens by allowing you to eliminate some or all of your debts.
A bankruptcy will be noted on your credit report for 6 years after you are discharged (released) from your bankruptcy.
After completing your bankruptcy or consumer proposal, there is absolutely nothing preventing you from applying for new credit (mortgages, credit cards, vehicle financing, etc.) before the notes have been removed from your credit report—just be sure you’re in a solid place financially before deciding to take on any substantial new credit.
How do I get a mortgage after filing for bankruptcy or a Consumer Proposal?
If you’re in the financial position to purchase a new home but have a bankruptcy or Consumer Proposal on your credit report, it is still possible to find a good rate.
Mortgage brokers or financial institutions are likely to approve a new mortgage at standard lending rates if it’s been at least two years since you completed your Consumer Proposal or bankruptcy. This is the easiest route to go after declaring bankruptcy, and one that we would strongly recommend.
If you’re still within that two-year discharge window, it’s still possible to obtain a mortgage using a subprime lender (a credit provider that specializes in borrowers with low or “subprime” credit ratings)—however, you will most likely need to secure a larger down payment and pay a much higher interest rate. And, while an independent mortgage broker may approve you for a mortgage sooner than a bank, we urge you to carefully consider if the cost of the terms makes sense rather than waiting the two years until you qualify for the “best rates”.
How important is my credit score when applying for a mortgage?
Other than the two-year waiting period, your credit score is a main factor in determining which lender you can work with. After you complete your bankruptcy or proposal, building up your credit score needs to be a top priority. Read about some proven strategies to help you re-build your credit after bankruptcy.
Lenders also may consider factors such as:
- Earning a steady income
- Having savings and other assets
- Loan-to-value ratio in the property
- Value and condition of the property
Can I renew my mortgage during a bankruptcy or a Consumer Proposal?
Bankruptcies and Consumer Proposals are used to deal with unsecured debts only, which means that declaring bankruptcy or making a Consumer Proposal does not typically impact the mortgage renewal process. If your mortgage is set to come due, speak to a Licensed Insolvency Trustee to ensure filing a bankruptcy or proposal won’t affect it.
Can a Consumer Proposal or bankruptcy help when applying for credit in the future?
Yes, it can!
Once you understand and embrace the short-term impact to your credit, you’ll be able to see and appreciate the immediate benefits. Filing a proposal or bankruptcy can:
- Stop the ongoing cost of your debt’s interest charges
- Reset your credit history
- Help you establish positive credit history
- Allow you to build up your savings
As soon as your debts have been eliminated, you’ll finally be able to start saving for your long-term financial goals that you couldn’t do while you were trying to pay off your debt.
If you’re struggling with debt but avoiding getting help because you don’t want to jeopardize your long-term financial goals, please reach out to a Licensed Insolvency Trustee to discuss your options. They’ll explain the bankruptcy and Consumer Proposal process and help you understand how you’ll be able to move forward, debt-free, and work towards achieving your future goals. With dedication, patience, and guidance from a trusted professional, your dream of owning a home can very much come true!
