Mortgage lenders look at your credit score and history, among other factors, when they determine your creditworthiness and, ultimately, your interest rate. So, if you’ve gone through bankruptcy proceedings or filed a consumer proposal to avoid bankruptcy, that may impact your ability to get a mortgage or one with optimal interest rates, at least in the short term. Employment and Social Development Canada reports that in 2011, 122,999 Canadians were unable to pay their debts, with an average amount owed of $119,021. One bankruptcy trustee estimates that one in six Canadians will eventually go bankrupt over the next three decades.
Bankruptcy stays on your credit report for seven years. However, you might be able to qualify for a mortgage as soon as two years after discharge from personal bankruptcy assuming you’ve re-established credit by paying bills on time (and ideally, in full), keeping your debt-to-income ratio low and so on. Securing new credit and using it responsibly should be a high priority following bankruptcy.
In evaluating potential borrowers, some lenders consider the reason for bankruptcy; for instance, filing due to a critical illness or accident might be looked on more favorably than filing due to poor credit management. Lenders may also be more inclined to lend to you if you did not have any accounts with that bank discharged during the bankruptcy. So, if you discharged accounts and debts with lots of different banks during bankruptcy proceedings, your mortgage options may be more limited.
Options for low credit scores
Mortgage lenders typically like to see a credit score of 700 or above, so if your credit score is below that threshold, you may not qualify for a low rate with an A lender (A lenders or prime lenders are conventional lenders that offer low rates to qualified borrowers). An A lender may offer you a rate premium or possibly a fee, or you may need to look at B lenders, also called alternative mortgage lenders. B lenders may have higher rates and fees, but they do offer loans to people who may not qualify with an A lender. A private lender may be another option, but again, you’re looking at higher rates and often higher fees. Private lenders usually also require a down payment of at least 25 per cent compared to 5 per cent with an A lender.
While a bankruptcy filing may make it more challenging to qualify for a mortgage, time and responsible credit use can help diminish that hurdle and move you closer to buying a new home.