For many Canadians, bankruptcy can feel like the end of any financial opportunities, but this isn’t the case. You might well be wondering if it’s possible to qualify for a mortgage after bankruptcy, and many individuals are pleased to discover that homeownership is still within reach with the right preparation and guidance. In fact, there are various ways to get a mortgage after bankruptcy. The key criteria that help lenders determine whether or not they’ll work with you is your credit score. Rebuilding your credit score following a bankruptcy filing is key, and at Spergel, our experts will help you to do this. Improving your credit score will increase your chances of an approved mortgage application in as soon as two years following your discharge. In this article, we explore the steps you can take to improve your chances of qualifying for a mortgage after bankruptcy.
How bankruptcy affects your mortgage eligibility
When you declare bankruptcy, it impacts your credit score and financial history, both of which lenders closely evaluate when approving a mortgage. Key factors that lenders consider include:
- Credit score
- Income stability
- Down payment amount
- Debt-to-income ratio
Bankruptcy stays on your credit report for 6-7 years (depending on the type), but it doesn’t mean permanent disqualification from homeownership. According to the Financial Consumer Agency of Canada, rebuilding your credit and demonstrating financial stability are critical steps to regain lender trust.
How to rebuild your credit after bankruptcy
Lenders want to see that you’ve regained financial stability. Here’s how you can rebuild your credit:
- Pay your bills on time: timely payments signal responsible financial habits.
- Use a secured credit card: a secured credit card helps rebuild credit while minimizing risk to lenders.
- Monitor your credit report: ensure that your bankruptcy is correctly recorded and that there are no errors.
- Reduce your debt: keep your credit utilization ratio low by paying off outstanding balances.
How long should you wait before applying for a mortgage after bankruptcy?
The waiting period before you can qualify for a mortgage depends on several factors:
- Discharge period: most lenders require proof of discharge from bankruptcy.
- Credit rebuilding time: aim for at least 1-2 years of solid credit activity post-discharge.
- Type of mortgage: some lenders specialize in helping individuals with past bankruptcies secure mortgages, although they may require higher interest rates or larger down payments.
How to qualify for a mortgage after bankruptcy
We recommend taking the following steps to increase your chances of having your mortgage application approved:
- Save for a larger down payment: lenders are more likely to approve your application if you can provide 20% or more. The Canada Mortgage and Housing Corporation (CMHC) outlines minimum down payment requirements, which may vary depending on the mortgage type.
- Demonstrate steady income: a stable job and consistent income are key factors in gaining lender trust.
- Work with a mortgage broker: brokers specializing in post-bankruptcy mortgages can connect you with flexible lenders.
- Consider alternative lenders: while big banks may be cautious, private lenders or B lenders often offer more lenient terms.
What type of mortgage should you get after bankruptcy?
Securing a mortgage after bankruptcy may seem challenging, but it’s not impossible. Many mortgage lenders consider individuals who have filed for bankruptcy as viable borrowers, often because they can charge higher interest rates. Additionally, these individuals typically have no outstanding debts and may be more financially responsible after completing mandatory credit counselling sessions. When exploring mortgage options after bankruptcy, there are several key factors lenders will assess:
- Time since bankruptcy discharge: the length of time since your discharge impacts your eligibility for different mortgage types.
- Credit score: your re-established credit plays a critical role in securing favourable terms.
- Down payment: the size of your down payment can influence the type of mortgage you qualify for.
- Debt-to-income ratio: lenders evaluate how much debt you have compared to your total income.
- Loan-to-value ratio: this ratio compares the mortgage amount to the property’s appraised value.
Based on these criteria, there are three main types of mortgages you may qualify for after bankruptcy:
Traditional or prime insured mortgage
- Offers the lowest interest rates but has stricter eligibility requirements.
- You must have been discharged from bankruptcy for at least two years.
- Requires at least one year of reestablished credit on two credit accounts.
- A down payment of 5% is required for the first $500,000 of the home’s price, with an additional 10% for amounts exceeding this. Mortgage insurance through CMHC is required if your down payment is less than 20%.
Subprime mortgage
- An option for borrowers who don’t meet the criteria for a traditional mortgage but exceed those for a private mortgage.
- Requires being discharged from bankruptcy for at least 3 to 12 months.
- Has less stringent credit and down payment requirements compared to a traditional mortgage.
Private mortgage
- Provides a solution immediately after bankruptcy for those unable to qualify for traditional or subprime mortgages.
- No reestablished credit is required.
- Typically requires a 15% down payment.
- Involves higher interest rates and may include a lender commitment fee of about 1% of the property’s value.
Can you keep your mortgage through bankruptcy?
If you already have a mortgage before declaring bankruptcy, it’s possible to keep your home. Before starting the bankruptcy process, your Licensed Insolvency Trustee will work with you on an assignment in bankruptcy. This is where your trustee will work to maximize what is given to creditors to whom you owe money. This includes any property, provided it has equity. If the value of your property is equal to what may be owed on your mortgage, your bankruptcy trustee may allow you to keep your home and continue making the payments. This means you can continue to have a mortgage after bankruptcy. Equally, if there is equity in your property, provided you can pay in the value of the equity into your bankruptcy, you may also be able to keep your home.
Why a consumer proposal might be better for securing a mortgage
A consumer proposal can often be a more favourable option compared to filing for bankruptcy if you’re planning to apply for a mortgage in the future. Unlike bankruptcy, a consumer proposal allows you to retain your assets, including your home, while negotiating a manageable repayment plan with your creditors. Additionally, because a consumer proposal shows lenders that you took responsibility for your debts and avoided declaring bankruptcy, it may have a less severe impact on your credit score. This can make it easier to rebuild your credit faster, improving your eligibility for traditional or subprime mortgages sooner. With a consumer proposal, you also avoid the “discharged from bankruptcy” requirement, which often delays mortgage approval, allowing you to access better rates and terms more quickly.
Take the first step toward homeownership
Qualifying for a mortgage after bankruptcy is challenging, but it’s achievable with patience and diligence. Focus on rebuilding your credit, saving for a down payment, and working with experts who understand your situation. Spergel’s Licensed Insolvency Trustees can support you every step of the way, offering personalized advice to help you achieve your financial goals.
If you want to learn more about qualifying for a mortgage after bankruptcy, book a free consultation with one of our experienced Licensed Insolvency Trustees. We will walk you through each step of the bankruptcy process. At Spergel, we have helped over 100,000 Canadians become debt free, and you could be next. You owe it to yourself.
