Qualifying for a mortgage after having declared bankruptcy is possible – here’s how:
Bankruptcies can be caused for all kinds of reasons; from divorces, to illnesses, to bad advice and even simple mismanagement, a bankruptcy can happen to nearly anyone. Even so, regardless of the reason, bankruptcy is serious. Once a person declares bankruptcy, and has it registered, the bankruptcy becomes visible on a person’s credit report, and remains there. From the time that the individual is discharged from bankruptcy, the bankruptcy remains on the report of a minimum of 6 years. Until the 6 years are completed, anytime that individual applies for any form of credit (credit card, auto loans, lines of credit, cell phone plan, etc) the credit grantor will see that this person has had a bankruptcy. During this period, securing credit can be difficult, and/or expensive. Even so, the most important thing to do after having been discharged from bankruptcy is to get credit, so as to rehabilitate your credit, and begin rebuilding your credit score and report.
“If you want to qualify for a mortgage in the future, the most important thing to do after having been discharged from a bankruptcy is to start rebuilding your credit”
Even though more expensive, establishing new credit after you’ve been discharged is incredibly important in the process of getting yourself ready to obtain a mortgage after bankruptcy. In order to obtain a mortgage after a bankruptcy, there are a few options:
1. Large Down Payment
There are Lenders in Alberta that will offer mortgages to existing and potential homeowners that have declared bankruptcy, and been discharged, but haven’t re-established any credit. These lenders often offer mortgages at a higher rate of interest compared to lenders who require borrowers to have re-established credit after discharge, and more importantly, these lenders often require substantial down payments. In most cases, after bankruptcy discharge, individuals are required to make a minimum down payment of 20% of the price of the home they are looking to purchase/refinance without re-established credit.
2. Rebuild Your Credit
Instead of coming up with a 20% downpayment, in order to qualify for a mortgage after bankruptcy, potential and existing homeowners can choose to rebuilt their credit. In order to qualify for the purchase of a home with a CMHC insured mortgage after a bankruptcy discharge and a minimum 5% down payment, you will be required to have re-established credit by way of 2 forms of credit reporting on your credit report for a minimum of 24 months reporting.
What this means is that you will be required to open 2 different types of credit (1 credit card and 1 auto loan, 2 credit cards, 2 auto loans, 1 credit card and a line of credit, etc), and have them in use for atleast 24 months. In addition, these credit forms need to be active for 24 months, and be active/open at the time of applying for a mortgage.
In most cases, credit is more expensive during the initial stages of credit rehabilitation after having declared a bankruptcy. Credit card companies may only offer you secured forms a credit with attached annual fees, and auto loans will likely come from sub-prime lenders at higher rates of interest. Even so, in order to qualify for a mortgage after bankruptcy, you will need to take on this form of credit. As your credit score, and report begins to recover, you’ll begin being able to qualify for conventional credit products, and get borrowing costs lowered.
A few important points to remember about rebuilding your credit:
- Credit only counts when you use it. If you open a credit card, but then don’t use it for 24 months, you will not have any re-established credit. Credit cards only count towards rebuilding for the purpose of securing a mortgage after bankruptcy when the credit form is active
- Credit is to be used wisely. Keep your balances below 75% of their limits, and pay off your balances in full anytime possible
- Any late payment/collection/judgement after your discharge will immediately make you unable to qualify for a CMHC insured mortgage as long as the bankruptcy is showing on your credit report
Qualifying for a mortgage after bankruptcy is a process, and in order to do so you’ll need to focus on rebuilding your credit. For more information about qualifying for a mortgage after bankruptcy, contact Alberta Mortgage.