Prerequisites and available options
To qualify for a mortgage or any type of loan-it is imperative to have received a certificate of discharge issued by a trustee in bankruptcy.
Once this document is in hand, if buyers have already filed for bankruptcy, some financial institutions may agree to finance their real estate project under certain conditions. In general, an initial deposit of at least 25% will be required, and borrowers will have to prove that they have sufficient income to meet maximum debt ratios.
If former bankrupts have a co-borrower with good creditworthiness, it is possible, under certain conditions, to obtain a loan with a minimum down payment of 20%.
Two years after the date of discharge from bankruptcy, and provided you have rebuilt your credit history without incident, it becomes possible to obtain a loan with a down payment as low as 5 or 10%.
However, you will need to have used at least two forms of revolving credit (credit card, line of credit, or in some cases, car or personal loan) after discharge for these credits to be taken into account.
Prerequisites and available choices
We frequently observe that customers, following their consumer proposal, do not apply for new credit cards, for fear of going back into debt. This reluctance can be an obstacle to obtaining a mortgage, or result in less advantageous loan conditions.
Before granting a mortgage, financial institutions evaluate two ratios: the gross debt service ratio (GDSR) and the total debt service ratio (TDSR).
These ratios measure, respectively, your housing costs as a percentage of your income, and the percentage of your income devoted to housing costs and other debts.
As a general rule, the GDS should not exceed 39% and the TDS 44%, although some alternative banks allow a TDS of 50% and an amortization period of up to 35 years.
There are other solutions:
Private Lender
Immediately after release without a co-borrower with a down payment of 35%, however, the interest rate could be higher (9.90% in October 2023), in which case this solution will be temporary, and the borrower(s) will be able to amortize the loan over 40 years or pay interest only.
In this case, we’ll analyze with you the options for exiting the loan at the end of 12 or 24 months, to enable you to lower the cost of borrowing.
Rent to own
It’s also possible to “rent to own”: with a down payment of 13 to 15% and a satisfactory income, you can have the property purchased by a company that will rent it to you for a period of 2 to 3 years, allowing you to reestablish your credit. At the time of the contract, the buy-back price in 2 or 3 years will already have been established.
It will be possible to buy back the house and obtain a mortgage. This solution often enables you to acquire a property that suits your needs, settle in, and not move again.
You’ll need to keep in mind that for this rent-to-own option to work, you’ll need to rebuild a solid credit history to be able to finance the buyback at the end of the contract.
Can a co-borrower or endorser help you?
Adding an endorser or co-borrower can make it easier to obtain a loan, especially if your file is slightly lacking in solidity.
Financial institutions prefer the presence of a co-borrower to that of an endorser, as it simplifies recourse in the event of default. It should be noted that the co-borrower need not be a co-owner of the property. Nevertheless, the co-borrower’s financial situation will be added to that of the main borrower when the file is evaluated, which may improve the chances of loan acceptance. But be careful, as this also affects your borrowing capacity.
Important points to consider
In general, a first bankruptcy remains on your credit file for six years from the date of discharge, while a consumer proposal remains on it for three years from the date of full repayment. To rebuild a solid credit record, it’s imperative to develop good financial habits.
How to rebuild your credit
- Credit analysis and verification:
Review your credit file to assess your spending and repayment habits. You can obtain a copy of your file by contacting Canada’s major credit-reporting agencies, such as Equifax or Transunion. - Budgeting:
To avoid falling back into debt, it’s crucial to keep a close eye on your monthly expenses. A well-planned budget will help you control your spending and live within your means. - Use a secured credit card:
A secured credit card, which requires a security deposit, can be an excellent way to rebuild your credit. Regular, responsible use of this card will help improve your credit rating, and it’s essential that you respect payment dates and, as far as possible, avoid exceeding 60% of the authorized limit (if your card has a $1,000 limit, don’t exceed $600 in outstanding balances, at the risk of stagnating or lowering your credit score.) It’s essential to repay all your loans on time, every month, to show creditors that you’re a reliable borrower. - Opening an RRSP account:
Opened specifically to help you lower your taxes and prepare a downpayment for the purchase of real estate, an RRSP account backed by an RRSP loan allows you to contribute to a registered retirement savings plan and use these funds for your down payment without incurring tax penalties. Keep in mind that if you want to use your RRSP as part of an HBP (Home Buyers’ Plan), your loan must first be paid in full.
hypotheques.ca offers you a wide range of options, and we have the expertise to meet all your credit needs.
Our team of highly qualified mortgage brokers will guide you in rebuilding your creditworthiness and provide expert advice on the steps you need to take.
We have an uncompromising commitment to our customers’ financial health and recovery. Our mission is to support and guide you in your best financial interests.
