Life after Bankruptcy: Can I qualify for a mortgage

^{Bromwich+Smith staff | Reading time: 4 minutes and 31 seconds | 906 words | Date: 2024/02/21}

Are you wondering what impact filing a bankruptcy today will have on your ability to obtain a mortgage in the future? Well, we have good news: filing for bankruptcy does not mean that your credit score will be ruined for the rest of your life, or that you will never be able to qualify for a mortgage again. Canada’s Bankruptcy and Insolvency legislation is designed to provide individuals relief from collection calls and overwhelming debt, but most importantly to give them a fresh financial start- and that includes being able to get a mortgage! 

MORTGAGES 

Mortgage lenders will consider five criteria when they are considering your mortgage application: 

• Character: things like your age, employment, and credit score/rating; 

• Collateral: the value of the home being purchased; 

• Capacity: what your income is and your ability to service your debts; 

• Capital: how much you can pay as a down payment; and 

• Conditions: things like interest rate or repayment term of the loan itself. 

Once you are discharged from bankruptcy you can apply for a mortgage, but it’s best to wait until you have built up some savings and reestablished your credit for at least two years. Before that, lenders may require a larger down payment or charge a higher interest rate, so taking the time to make sure you are ready is well worth it. 

For the purposes of this article, we will focus on what we at Bromwich+Smith know best, your credit rating and credit score. 

CREDIT RATINGS 

Credit ratings in Canada go from R1 to R9. If you have an R1 credit rating, this means that you pay your bills on time every month, an R2 means you pay your bills 30 days late, an R3 means you pay your bills 60 days late, and so on and so forth until you get to R7. The R7 to R9 ratings are associated with formal insolvency filings like a consumer proposal (R7) or a bankruptcy (R9). The bad news is that an R9 credit rating will have a big impact on your mortgage application. The worse news is that you may have an R9 credit rating already if your accounts are past due and in collections.  

After filing your first bankruptcy you will have an R9 credit rating for 6 years following your discharge. While your score will not change during those 6 years, you can (and should!) start to rebuild your credit. A proposal will change your credit score to an R7 and will remain on your credit report for 3 years following the completion of the proposal. 

CREDIT SCORES 

Your credit score is a numerical representations of your ability to manage credit and repay loans. Lenders use credit scores to assess the risk associated with lending money. Here’s how your credit score is determined: 

 Payment History (35%): This is the most critical factor. It reflects whether you've paid past credit accounts on time. Late payments, defaults, or bankruptcies negatively impact your score. 

 Amounts Owed (30%): The total amount you owe across different accounts, credit cards, loans, etc., compared to your credit limits or original loan amounts. High credit utilization can lower your score. 

 Length of Credit History (15%): The length of time your credit accounts have been open. A longer history can positively influence your score. 

 Types of Credit in Use (10%): A mix of credit types, like credit cards, installment loans, mortgages, etc., can positively impact your score if managed well. 

 New Credit (10%): Opening several new accounts in a short period may indicate higher risk and can lower your score temporarily. 

Click to Book A Free Consultation

 REBUILDING CREDIT 

Lenders will use credit ratings and credit scores to evaluate how much they’re willing to lend someone, what interest rate someone can qualify for, and other loan terms. Because credit scores are based on your credit use, the best way to rebuild your score is to get any type of credit and make sure to use it responsibly. Make your payments on time and in full – never spending more than you can pay off. A low limit secured credit card, an RRSP loan, or paying your car loan are all great options for rebuilding your credit.  

It also important to start a savings account and to get in the habit of putting away a little bit every paycheck. The savings account can be for a specific purchase like a house or vacation, but it will also provide a cushion for unexpected expenses and stop you from living paycheck to paycheck.  

ARE YOU READY? 

We suggest visiting our online webinars with Richard Moxley, credit expert, to make sure you are doing everything you can to rebuild your credit and prepare you for your mortgage application. A mortgage broker can also help you to find the right lender for you.  

We promise there is life after bankruptcy and financial security and home ownership are possible. For a personalized look at your situation, we offer free, no obligation, confidential initial consultations by phone or video. Our Debt Relief Specialists are here to assist you with unbiased and nonjudgmental support, ensuring you find the right solution that will help you conquer your debt and rebuild your worth today. We are here if you need us and are excited to see you conquering your debt. 

Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at  1.855.884.9243, Live Chat  or you can request a call back at contact us page. We want to see you flourish!