Many Canadians find themselves bogged down with a bad credit rating for the wrong reason – illness, losing a job or simply not understanding consumer credit. Sometimes bad financial situations happen to good people and bankruptcy is the only way out. But it’s not all doom and gloom – there are a number of strategies for putting one’s credit back on track and getting approved for a mortgage, even after bankruptcy.
The following are some key points to take into account:
- Reasons for bankruptcy: If a bankruptcy was due to factors beyond your control, this is more acceptable to the lender than if the bankruptcy was the result of poor money management and excessive debt, which can affect the terms of an applicant’s mortgage approval.
- Length of time since bankruptcy discharge: Different lenders have different criteria regarding the length of time since a bankruptcy after which they will grant a mortgage – typically two years along with proof of re-established credit. Some lenders will consider applicants with a more recent bankruptcy as long as the bankruptcy has been discharged.
- Locating the right lender: Some lenders will simply not approve a mortgage if a bankruptcy shows up on a credit report. However, some lenders on the B-side (alternative lenders) will consider doing so, provided the borrower can demonstrate that he or she has the income to support the payments and is now a lower credit risk.
- The type of property: Lenders prefer to lend against properties located in urban centres and that are highly marketable, in desirable neighbourhoods and in good condition.
- Size of down payment: With a past bankruptcy, most lenders will consider at least a minimum 20 per cent down payment consisting of 10 per cent of the down payment coming from borrower’s own funds.
- Credit report: A detailed history of how consistently one’s financial obligations are met, a credit report provides a picture of financial health based on past behaviour. You can obtain a copy of your credit report for free from Equifax at www.equifax.ca and Trans Union at www.transunion.ca.
- Credit score: A credit score is an objective summary that translates personal information from a credit report and other sources into a three-digit score representing overall credit-worthiness. A borrower’s credit score may determine the rate of the mortgage; the higher one’s credit score, the better the rate which can be negotiated. Some lenders have minimum credit score requirements for those with a previous bankruptcy.
- Rate considerations: Most lenders charge a higher interest rate and even some extra fees to those with a bankruptcy. A lender may grant a better rate if certain lending criteria have been met, such as: two years since bankruptcy discharge, good re-established credit, minimum beacon scores, saved down payment, good debt servicing ratios and a long-term history of job stability.
- Re-established credit: Re-established credit shows the lender that a prospective borrower has new credit and has managed it well since bankruptcy. Typically, re-established credit should involve a recent record of on-time payments on credit cards. Those rebuilding their credit need to be aware that a missed payment at this stage could be mentioned on one’s credit report for the next six years, and could be grounds for some lenders to decline a mortgage application.
- Don’t do it alone: For those with bad credit and/or bankruptcy, a mortgage expert can coach you on how to improve your credit score over time and help find an open-minded lender. While you work on bettering your score, your mortgage expert can advise on how to get a mortgage despite bruised credit. They provide valuable advice before and during the home buying process.