In this article we’ll explore the consumer proposal, and look specifically at how filing a consumer proposal impacts your current home, your ability to get a mortgage, and what it does to your credit profile more generally.
What is a consumer proposal?A Consumer Proposal is a formal agreement designed to help you manage your debt problems if you’re a resident in Canada.
If approved by the court, it would require creditors who are owed money from you to accept less than their original balance so that you can work on paying off all of your debts over time.
Turning all your debts into monthly payments helps people managing debt to several creditors, and will allow you more financial freedom while still paying off the debts you can afford.
What will happen to my home if I file a Consumer Proposal?If you own your home, nothing changes. You can continue owning and living in it as long as you meet the obligations set out by the Consumer Proposal, such as making regular payments on time, while also maintaining your mortgage payments.
Your mortgage company or the financial institution you have borrowed from may require extra evidence that they you can manage your Consumer Proposal alongside your mortgage commitments, but you shouldn’t have a problem as long as you reassure them they will receive their full payment every month.
How does a consumer proposal affect my credit report?Your credit report is a personal credit history that includes all of your financial transactions. Credit bureaus will collect these transactions and use them to give you a credit score (or credit rating) which gives traditional lenders an idea of how reliable you are as a borrower.
Any red flag on your credit report, from late payments to defaulting on your debt load, will be recorded on your credit report and is likely to damage your credit score. Because credit scores give lenders an indication of how trustworthy you are, a bad credit score can make it harder for you to access certain credit products.
In filing a consumer proposal, you’re letting your creditors know that you can’t afford to repay the full amount you borrowed, so it will have a negative impact on your credit score. It’s worth remembering, however, that a defaulted payment will do similar damage to your credit report, and a Consumer Proposal gives you the opportunity to rebuild your credit profile.
Will a consumer proposal impact my ability to get a new mortgage?When you apply for a mortgage, you’re effectively borrowing money from a mortgage lender in order to fund the purchase of your home (minus your down payment), and you’ll repay your debt every month in the form of a mortgage payment.
It would be wrong to say that having a consumer proposal doesn’t impact your ability to get a mortgage in any way. Lenders are more likely to accept an application from someone with a strong history of repaying what they owe, whereas a consumer proposal implies that you have had financial difficulties in the past.
That doesn’t mean it’s impossible to get a mortgage with a consumer proposal – just a bit more difficult than in normal circumstances.
Can you get a mortgage during a consumer proposal?A Consumer Proposal can’t prevent you from obtaining a new mortgage, even if your current one is not yet paid off. You should still be able to give the bank all required documentation including pay stubs and income tax returns.
And while some creditors may hold up approval of a mortgage until debts are settled through a consumer proposal, others might not even be aware that you’ve filed a Consumer Proposal until the process is over.
As long as you can put down a significant down payment to lower the liability to the mortgage lenders (around 20% would be useful) and have taken steps to prove you aren’t a bad credit risk, then you will give yourself a reasonable chance of being accepted.
That said, it’s still best to wait until your Consumer Proposal is complete and the court has approved all payments before applying for another loan.
Can you get a mortgage after a consumer proposal?If you’re interested in mortgage financing after a Consumer Proposal, mortgage brokers will look for evidence that you represent a low credit risk. In order to judge that, it’s likely they will ask the following questions.
Have you managed to improve your credit score since the end of your consumer proposal?Any mortgage agent will want to see evidence that an individual who has previously filed a Consumer Proposal has worked to improve their credit profile. They will usually ask for proof of a two-year timeline after the arrangement ended where you can show your credit has improved.
Have you managed to secure a credit card or another new line of credit?Linked to the above, rebuilding credit often means taking on a new form of credit, whether that’s credit card debt or another line of payment. If you have built up a history of using and paying off credit since the end of your Consumer Proposal, it will reassure your mortgage broker that you can be trusted to repay what you owe.
Have you saved a reasonable down payment for a new home?No different from getting a mortgage in normal circumstances, the bigger your down payment, the more likely you are to get a mortgage. By putting more money into the property yourself, you’re minimizing the risk for the lender. For people with Consumer Proposals, mortgage brokers would probably expect a down payment of around 20% of your total mortgage.
Is there a mortgage broker for people with a low credit score?There are alternative lenders available in Canada for people with bad credit, so it’s understandable that they might be considered an option for anyone coming out of a Consumer Proposal who worries they would be rejected by traditional lenders.
An alternative lender may offer you a better chance of being accepted for a mortgage – their marketing often talks about how you’re guaranteed to be accepted no matter your credit history, but being accepted by these kinds of lenders will come at a cost.
Lenders who target clients with a poor credit history know you have few alternatives and will use that to their advantage, often by adding high interest rates on top of your repayments, and charging expensive late fees if you ever miss a payment.
What if I need debt advice and support with my financial life?If you’re a homeowner facing financial difficulties and are worried about meeting repayments on your debts, you may have done some research on the debt solutions available to you.
At the same time, you may be concerned about the implications for your existing mortgage, or your chances of getting a mortgage in the future. That’s where we can help.
For confidential debt advice from people you can trust, call A. Fisher & Associates today.