Getting a Mortgage After Bankrupcty

Sometimes bad things happen to good people.  Canadians who have declared bankruptcy in the past may have difficulty re-establishing their credit in order to obtain mortgage financing.  Many Canadians have been forced into bankruptcy due to divorce, illness, loss of job and other uncontrollable situations.  This doesn't mean that once bankrupt, you cannot obtain a mortgage until the bankruptcy record "falls off" your credit bureau in six years.  It just means that you have to work to re-build your credit before you qualify for mortgage financing.

Here are some tips and steps you should take as soon as you are discharged from bankruptcy:

1.  Send in your letter of discharge, along with the complete list of tradelines that were included in the bankruptcy to both credit reporting agencies in Canada:  TransUnion and Equifax.  This is very important, as often the bankruptcy has not been reported correctly.  The tradelines (credit cards, lines of credit, loans, etc.) that were included in the bankruptcy should have zero balances owing on the credit reports and should be marked "Included in Bankruptcy".  Any reporting errors will slow the credit score rebuilding process.

2.  Check your credit reports to ensure that the bankruptcy has been recorded correctly.

3.  As soon as you are able, apply for a secured credit card that will report to both credit reporting agencies.  If you are married, you can apply for a joint card reporting on both your bureaus.  In Canada, Capital One and HomeTrust Visa offer secured credit cards after a bankruptcy discharge.  The way this works is that you must provide a deposit to the credit card company (best amount is $1,500, but you can start lower and build up to $1,500).  The secured credit card company then issues you a credit card with a limit equal to the deposit (the deposit is kept in an interest bearing GIC held as security against the credit line, but this is not the same as a pre-paid credit card).   Make every payment on time - everytime - no exceptions!  You cannot have any derogatory credit (slow payments, collections, judgements, etc.) on your credit report after bankruptcy, or you will ruin your chances for mortgage financing!

4.  Try to keep the credit outstanding on the new credit line below 70% of your limit to optimize your credit score (example, if you have a credit card with a $1,000 limit, try to keep the balance owing to less than $700.)

5.  If possible, try to establish a second tradeline reporting on your bureau.  You may be fortunate enough to have a relative who would be willing to co-sign a small loan for you.  Sometimes it is a good idea to take out an RRSP loan, and have a strong co-signer - but you must make sure that the loan reports on your credit bureau.

It is possible to get mortgage financing with as little as 12 months re-established credit reporting on your credit reports, providing that the minimum credit limit is at least $1,500.  CMHC will approve mortgage financing with 5-10% down payment if you have a lender who is supporting the mortgage financing, the reason for the bankruptcy was understandable, and all other conditions are "perfect" (job stability, down payment from your own resources, etc.)  Many lenders, however, are looking for 2 years re-established credit and a minimum of two new tradelines reporting.  Some "A" lenders will decline mortgage financing if there is a bankruptcy on record, so it is important to consult an Accredited Mortgage Professional to help you select a lender willing to work with previously bankrupt mortgage applications.  If you have not re-established new credit, your credit score will be frozen at the score reported on your bankruptcy discharge - likely well below the minimum credit score of 600 required for mortgage financing.  So re-establishing credit is the most important thing you can do to get back on track.

There are alternative and private lenders who will finance previously bankrupt individuals who have not re-established credit, but the interest rates and down payment required will be substantially higher.

As an Accredited Mortgage Professional,  I would be able to assist you with advice on how to re-establish your credit and find a lender who would be willing to support your mortgage application.