Whether you have car loans or personal loans, filing for bankruptcy is a difficult decision that can have a significant impact on all aspects of your life. Nevertheless, for some people, it can be the only solution to a life free from debt.
If you’ve filed for bankruptcy in the past, it’s normal to be worried about your financial future and, in particular, how long it’s going to take to rebuild your credit.
But the question on most people’s minds after they have been discharged from bankruptcy is: How long after bankruptcy can I get a mortgage?
It’s a common misconception that, in order to get a mortgage, you must have a perfect credit history with no evidence of debt or bankruptcy.
But despite what you might have heard, it is possible to get a mortgage and afford monthly mortgage payments after bankruptcy with a little time and patience.
In this guide, we’ll outline everything you need to know about Canada mortgage rules, from what bankruptcy is to how long after declaring bankruptcy you can get a mortgage.
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What is bankruptcy?
Put simply, bankruptcy is the legal process for someone who is insolvent which (i.e. they owe more than the total value of their assets and are unable to pay their debts).
Bankruptcy provides legal protection from creditors, protects assets, and eliminates debts.
It is governed by the Bankruptcy and Insolvency Act (BIA) and can only be filed with a Licensed Insolvency Trustee (LIT) who will manage the entire bankruptcy process and communicate with your creditors on your behalf.
It is usually only considered after other, less serious, debt solutions have been considered, such as a consumer proposal.
Can I get a mortgage after bankruptcy?
If you have recently been discharged from bankruptcy and want to qualify for a mortgage in the near future, the most important financial decision you can make is to start building re-established credit as soon as possible.
While bankruptcy will remain on your credit report for six or seven years (14 if it’s your second bankruptcy), there are steps you can take to improve your credit score in the meantime and boost your chances of being qualified for a mortgage.
If you are considering getting a mortgage after you have filed for bankruptcy, you may find it difficult to use a traditional mortgage lender.
There are mortgage brokers that specialize in helping people who have filed for bankruptcy obtain a mortgage (often known as bankruptcy mortgage lenders).
How long after bankruptcy can I get a mortgage?
In Canada, there is no official period of time you must wait before you can apply for a mortgage after bankruptcy.
However, it is universally agreed that the more time you have had to rebuild your credit – and the more time you have to save for a down payment – the more likely you are to be approved for a mortgage.
The Canada Mortgage and Housing Corporation suggests people to wait at least two years from the date of discharge from bankruptcy to apply for a mortgage.
This also depends on the type of mortgage you wish to apply for with the rules differing slightly depending on whether you wish to apply for a traditional or prime insured mortgage (requires a down payment of 5-20%), a subprime mortgage (for borrowers that don’t qualify for a traditional mortgage but whose credit exceeds a private mortgage) or a private mortgage (for borrowers financially unlikely to secure a traditional mortgage).
With a traditional mortgage, you must have been discharged from bankruptcy for at least two years and one day whereas, with a subprime mortgage, you must have been discharged from bankruptcy at for at least three to 12 months.
With a private mortgage, on the other hand, it is possible to get a mortgage as soon as one day after being discharged but interest rates are likely to be much higher and a lender commitment fee may be required.
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How can improve my credit score after bankruptcy?
There are several things you can do to improve your credit score after bankruptcy and increase your chances of being approved for a mortgage, including:
- Make monthly payments in full and on time
- Apply for a secured credit card
- Review your credit score regularly
- Check your credit report for errors
- Practice healthy financial habits
However, one of the quickest ways to improve your credit score after being discharged from bankruptcy is to keep your credit utilization as low as possible for as long as possible. This, essentially, means using as little of your credit line as possible at any given time with most experts advising 30% or less.
For example, if you have a credit card with a $1,000 limit, you should aim to keep your balance at $300 or less whenever you can.
What does my credit score need to be to get a mortgage after bankruptcy?
If you’ve recently been discharged from bankruptcy, you’ll know how much of an impact it can have on your credit score and how much this can decrease your chances of being approved for credit.
But whether you’ve already started building your credit back up or you just don’t know where to start, you might be wondering what kind of credit score you should be aiming for before you can even think about applying for a mortgage.
Here is a rough guide of what you can expect when you start to improve your credit score in preparation for applying for a mortgage after bankruptcy:
While other factors are also taken into consideration, a credit score of 680 or above should put you in a good position to be approved by almost every lender in the market.
Generally, a credit score of 650 or above should allow you to finance your down payment through borrowed funds or credit.
It is widely accepted that a credit score of 600 or above is required for a 5% down payment.
If your credit score is around the 500 mark, a minimum down payment of 20% will be required and you may be limited to a private lender.
With a credit score of 500 or less, a down payment of 35% or higher may be required and you may only have a chance of success with a private lender.