If you are bankrupt, you may think you can never own your own home. This is not the case, though it will be a long journey. You will need to restore your credit, and enlist the help of a mortgage brokerage firm.
Reputable mortgage brokerage firms have a wide range of services, including arranging mortgages for self-employed people, people with credit issues, and people in financial distress situations. They key point to remember is: restoring your credit will take time.
Bankruptcy: an overview
If you have filed for bankruptcy, your debts will be handled by your trustee. This trustee—licensed by the Office of the Superintendent of Bankruptcy—will notify all your creditors. Your trustee will also sell your assets, and distribute the money to your creditors.
Arranging a mortgage
Mortgage brokerage firms need security for their loan. Your credit rating is the major factor in their decision to grant you a loan. Your prospective lender want to ensure you can repay their loan, but will also take into account your down payment.
The editor of Canadian Mortgage Trends, Rob McLister, has some good news for people who have declared bankruptcy. If you have fully established your credit, you are not a “tough sell” from the lenders point of view.
Once credit is re-established, your mortgage brokerage firm can apply to the prime lenders, who offer the best interest rates on mortgages.
In some cases, declaring bankruptcy or filing for a consumer proposal may even help you get a mortgage. Andy Fisher, a trustee in bankruptcy with A. Farber & Partners Inc, explains this seemingly counter-intuitive statement. “There are people who are carrying a lot of unsecured debt where it is difficult to carry that debt and save money to buy that house.”
The bankruptcy proceeding diminishes this unsecured debt load, though it makes the mortgage process years longer. Bankruptcy affects your credit rating, and you must take steps to restore it if you want to get a good rate.
“I’m not suggesting you go bankrupt to try and buy a house,” Mr. Fisher said. The homeowning process takes much more time after bankruptcy.
You will not get a mortgage lender until at least two years after you are discharged from bankruptcy.
How to restore your credit
You can take steps to restore your credit immediately. Understanding the causes of your bankruptcy is the first step. Financial counselling is part of the bankruptcy process—you are required to attend two financial counseling sessions. The sessions will help you analyze why you had to declare bankruptcy, and will help you make a financial plan for the future.
Discharge from bankruptcy
The timing of your discharge from bankruptcy depends on your surplus income. This income is the amount which exceeds the income your family needs to maintain a reasonable standard of income, and is set by the Office of the Superintendent of Bankruptcy Canada.
If it’s a first bankruptcy, you will be discharged:
- 9 months after filing if your surplus income is less than $200
- 21 months after filing if your surplus income is greater than $200
Restoring your credit
Your credit score depends on several factors, according to the director of operations of Equifax Canada Inc, Paul LeFevre.
- 35% of the score is based on payment history.
- 30% of the score is based on how you used your credit.
- 15% of the score is the length of your credit score history.
- 10% of the score is the type of credit you have. This includes the amount of retail credit cards.
- 10% of the score is the history of background checks on your credit.
Please note, all these percentages are approximate.
Paying all your bills on time is essential in restoring your c areredit. You have to work hard to earn the lenders trust. Even missing one or two credit card payments will be a severe setback, and may even lose you a prime lender.
It generally takes two years of paying your bills on time after you discharged from bankruptcy.
Above all, you must avoid a second bankruptcy. It’s unlikely that any prime lender would consider you after a double bankruptcy, and you would be forced to rely on the non-prime lenders and their high rates of interest.
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The author of the article is Jeremy Benson. He has been writing about finance, mortgage and Canadian law since 7 years. Blogging is one among his greatest passions. Follow him on [email protected].