“When things go wrong, as they sometimes will, when the road you’re trudging seems all up hill, … when care is pressing you down a bit, rest, if you must, but don’t you quit.” ~ anonymous.
Those words perfectly describe today’s topic. If you’ve been through a recent bankruptcy, you know all too well the financial challenges that exist after. One of the biggest challenges is getting a mortgage. So what do you do? Is it possible to emerge from bankruptcy and buy your next home? Of course it is! But there are a few steps you need to follow first. If you want the shortest line to mortgage approval success, follow the steps outlined below.
But first, let’s take a quick look at time frames. How long before most lenders consider you as an applicant? I wrote a blog post on this very topic earlier this year. You can read the entire post at Bankruptcy: How Long After Can You Apply For a Mortgage. Basically, lenders usually want you to be discharged for 2 years with re-established credit. This usually means 2 trade lines of combined $2500-$3000 reporting for 24 months with no derogatory information.
If your loan-to-value is low, and your income is stable with good job tenure, some lenders will consider approving the loan before the 2 year mark. Here’s what you can do starting tomorrow to get lenders to consider approving your loan post bankruptcy.
6 Crucial Steps to Mortgage Approval Post Bankruptcy
Step 1: Get Official Discharge Quickly – It’s no secret that good credit is vital when applying for a mortgage. The quicker you get discharged from your bankruptcy, the quicker you can start rebuilding your credit. Start by reaching out to your local bankruptcy trustee. They can help you find the best plan for a complete discharge in the shortest time possible. You can find a local bankruptcy trustee here.
Step 2: Review Your Most Recent Credit Score - Check your credit score. You can get a copy of your report from Equifax and Transunion Canada. Pull both. Make sure that there are no surprises on your report, and that the debts included in your bankruptcy have been paid off. What if you find information in your report that is inaccurate or incomplete? You have the right to explain or dispute. Contact the credit reporting agency about their dispute resolution process. If you still do not agree with an item following the agency’s investigation, visit TransUnion-explain or Equifax-explain to find out how you can add an explanatory statement to your report.
As a rule, it’s a good idea to request a copy of your credit report from the above two credit-reporting agencies yearly. You’re looking for correct personal information, financial information, and to ensure that you have not been the victim of identity fraud.
Step 3: Re-establish your credit - a mortgage is much easier to get with good credit. You want to start rebuilding your credit as soon as possible. It is one of the best things you can do to bounce back quickly. I recommend getting at least two trade lines. Secured credit cards are a great way to get started. A secured credit card is just like a regular credit card, but with no risk to the issuer. This type of credit card requires a security deposit for eligibility. Your credit limit is then set at the amount of the deposit. You can put down as little as $500 to get started. Virtually everyone is approved. There are a few cards on the market to consider: Capital One, Home Trust and PeoplesTrust. A secure credit card will help to re-build that oh-so-important credit that’s required when it comes time to applying for a mortgage. Here are 9 additional tips on how to re-establish your credit.
Step 4: Pay Any Outstanding Taxes to Revenue Canada – Even though you’ve been discharged from bankruptcy, mortgage lenders will want verification you have paid outstanding taxes to Revenue Canada. The lender will request tax returns from the previous year showing that the income taxes were paid in full – make sure that they are. Your dream of buying a home stops here if taxes are unpaid.
Step 5: Start saving money. Easier said than done, I know. But, you will need a down payment to buy your house. Start by opening a bank account that works for you. You shouldn’t be spending your hard-earned money on maintenance fees, and you also should be earning some serious interest on your checking and savings accounts. Try saving on a regular basis. Consider setting up an automatic savings plan and set up a budget. To get a better handle on your monthly budgeting, use this free personal monthly budget planner from Microsoft: Personal Monthly Budget Planner . And be sure to pay all your bills on time. Check out this creative resource for over 100 money saving ideas.
Step 6: Put Budgeted Savings into an RRSP for Down Payment. If you are a first time home buyer in Canada, you can borrow up to $20,000 from your RRSP. Use those funds as a down payment on your new home. Since contributions to an RRSP generate a larger tax refund, you can use your tax refund to grow your savings even faster. Using the government’s money is a smart way to save up a down payment. For additional ways to best leverage an RRSP, check out the “one formula approach”.
Qualifying Lending Types:
To qualify for a mortgage in Ontario after bankruptcy there are typically 3 options. Mortgages generally fall under one of three lender types:
- traditional lender,
- subprime lender,
- and private lender.
Which lender you need depends on how long you’ve been discharged from bankruptcy, whether or not you have re-established credit and how much equity or down payment is available.
Finally, remember to keep all of your bankruptcy documents on hand.
Even though your bankruptcy has been discharged, the lender which you are applying for mortgage with may ask you to provide a copy of the statement of discharge along with copies of the bankruptcy papers showing all the creditors, accounts and balances that were included in the Bankruptcy.
Getting a mortgage after bankruptcy is possible if you follow the tips above. You’re now on your way to getting mortgage approval. As always, if you have any questions, I am here to help.