One of the most common misconceptions about bankruptcy is that it disqualifies you from getting a mortgage. However, the good news is that obtaining a mortgage is possible after being discharged from bankruptcy. But exactly how long after bankruptcy can you get a mortgage in Canada?
Lenders’ policies may vary. But in general, you may be eligible for a mortgage anywhere from 1.5 to 2 years following your discharge date. Some lenders may even consider your application earlier than that.
Like other types of loans, a solid credit history is essential to securing a mortgage post-bankruptcy. The better the shape your finances are in, the greater your chances of qualifying for a loan.
In this article, we’ll explain how bankruptcy affects your current mortgage and your ability to get approved for one in the future. We’ll also cover the eligibility requirements you’ll need to meet and some tips to re-establish your credit.
How does bankruptcy affect your mortgage?
Declaring bankruptcy won’t directly impact your mortgage. The reason is that bankruptcy deals exclusively with unsecured debts, such as credit cards and payday loans. A mortgage is a type of secured loan, meaning there’s an asset that acts as collateral for the lender. In this case, the collateral is your home.
Though filing for bankruptcy won’t eliminate your mortgage, you can still keep your home. The Bankruptcy and Insolvency Act prohibits your mortgage lender from repossessing your home simply because you’ve declared bankruptcy. They can only do so if you default on your mortgage payments.
There are no requirements under bankruptcy law to surrender your home to your unsecured creditors. However, you may need to pay a portion of your home equity to settle your debts. This amount will depend on which province you live in and how much equity your property has.
For example, up to $10,783 of home equity is exempt in Ontario, meaning it’s inaccessible to your creditors. However, suppose your home equity exceeds this limit. In that case, your Licensed Insolvency Trustee may require you to pay the full equity. By doing so, you can keep your home and continue paying down your mortgage.
Learn more about bankruptcy exemptions and whether you’ll lose your home when filing for bankruptcy.
How does bankruptcy impact a mortgage renewal?
Let’s assume your mortgage terms expires during bankruptcy. Will your lender allow you to renew your contract?
That’s a tricky question, as each lender’s policy will differ regarding how they handle renewals.
However, it’s worth mentioning that your lender would prefer to renew your mortgage rather than foreclose on your home. They would lose out on many years of future interest revenue if they chose the latter option.
Usually, your mortgage lender will deny your renewal only if they believe the risk of default is dangerously high. Provided you stay current with your payments throughout bankruptcy, you should have no difficulty renewing your mortgage.
How soon can you apply for a mortgage after bankruptcy?
It’s possible to secure a mortgage 1.5 to 2 years after your discharge date. This waiting period is the industry standard for a conventional mortgage or one insured by the Canada Mortgage and Housing Corporation (CMHC).
Remember that this time frame applies to prime lenders. You may qualify for a mortgage earlier if you seek financing from a subprime or private lender (more on this later).
You may wonder why qualifying for a mortgage is possible after you’ve gone through bankruptcy. The main reason is that lenders will view you as a less risky borrower. Since bankruptcy has eliminated your debts, you’re less likely to default on mortgage payments. Also, you may be more financially responsible as you’ve completed credit counselling.
Of course, you’ll only get a mortgage if you have done the necessary work to rebuild your credit! No lender will wish to extend credit to you if you’ve done nothing to prove that you’re a trustworthy and responsible borrower.
What type of mortgage can you qualify for after bankruptcy?
You can apply for a wide range of mortgages following your bankruptcy discharge. But not all lenders will be willing to approve you for financing.
Lenders will assess your eligibility based on several factors. These include your
- credit score
- down payment size
- gross debt service ratio (GDS)
- total debt service ratio (GDS)
- Your bankruptcy discharge date
How quickly you can acquire a mortgage will depend on the type of lender you approach for financing.
Some lenders have strict qualification requirements and won’t lend to those who’ve recently emerged from bankruptcy. As a result, you’ll need to be patient and wait for more time to pass following your discharge date. You’ll also need to rebuild your credit to a higher standard.
Other lenders have lenient standards and readily accept borrowers with less-than-stellar credit histories.
In general, you can lump mortgage lenders into three categories: prime, subprime, and private.
Prime lenders are reputable and well-established financial institutions like the Big Five banks. They specialize in conventional or CMHC-insured mortgages and offer competitive interest rates.
However, they also maintain the highest application standards, so getting approval for financing could be a struggle.
First, you’ll have to wait at least two years after your bankruptcy discharge date to qualify for financing.
Second, you must have built up a one-year track record of positive credit history for at least one year on two loan products (meaning no late payments).
Third, you’ll need to satisfy the other baseline eligibility criteria. These can vary from lender to lender, but the figures below serve as good guidelines:
- A minimum credit score between 650 and 680
- GDS between 35% and 39%
- TDS between 42% and 44%
- Minimum down payment between 5% and 10% of the property’s purchase price
- Minimum loan-to-value ratio (LTV) of 95% for a CMHC-insured mortgage and 80% for a conventional mortgage
Subprime mortgage lender caters to borrowers who don’t qualify for a conventional or CMHC-insured mortgage. Typically, individuals who seek out subprime lenders have credit scores below 640.
You could be eligible for a subprime mortgage in as little as three months to a year following your bankruptcy.
The minimum down payment required is usually between 15% and 20%. The maximum GDS and TDS ratios a lender will accept can vary considerably, as can the minimum credit score required.
Though the eligibility criteria are far less demanding, subprime lenders charge higher interest rates than prime lenders. In addition, they offer shorter terms, charge higher fees, and impose more restrictions on your mortgage contract.
You could get a mortgage through a private lender the day after your bankruptcy discharge. The reason is that private lenders have very relaxed lending standards. This trait makes them a convenient financing source if you still have bad credit but are eager to purchase a home.
Eligibility requirements for private mortgages typically include a sizable down payment (at least 15%) and full property appraisal. Minimum credit scores and maximum debt service ratios can vary widely.
However, many risks come with applying for a loan through a private mortgage lender:
- They assign steep interest rates (think double digits)
- They charge broker commission fees and set-up fees ranging from 1% to 3% of your mortgage amount
- They tend to act more quickly to foreclose on your home if you miss payments
Tips for getting a mortgage after bankruptcy
Undoubtedly, bankruptcy will delay your ability to get a mortgage – but only temporarily. Once you improve your credit standing, lenders will be more than willing to consider your mortgage application.
Therefore, taking steps to boost your credit score as soon as possible should be your first step. Here are some strategies you can employ:
- Get 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 some hard work, diligence, and patience, you’ll have a shot a purchasing a home in as little as two years.
When you’re ready to apply for a mortgage, shop around to explore what options are available to you. Remember: the sooner you wish to acquire a mortgage post-bankruptcy, the worse the interest rates and terms you’re likely to be offered.
Consider hiring a mortgage broker to help find the best deal, as they have access to a broad range of lenders. They can even introduce you to one who has experience issuing mortgages to those who’ve gone through bankruptcy.
Concerned about the impact bankruptcy can have on your ability to get a mortgage? Then don’t hesitate to book a free consultation with David Sklar & Associates.Contact David Sklar
As Licensed Insolvency Trustees with over two decades of experience, we can assess your financial situation and guide you through the bankruptcy process step by step.
We can also help you craft a plan to rebuild your credit in the shortest time possible. That way, you won’t have to wait too long before moving into your new home!
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