Mortgage Options for Previously Bankrupt Clients
The reasons for claiming bankruptcy are many and varied: job loss, separation and divorce, a failed business, and financial mismanagement are some of the common ones.
A bankruptcy is not something that goes away quickly. In fact, a personal bankruptcy stays on a personal credit bureau for 7 years (14 years for a double). But does a bankruptcy mean that a person has abandon the dream of homeownership? The simple answer: No. With a good mortgage broker and the right lender, there is light at the end of the tunnel for those people who have landed in the red one too-many times.
Canadian mortgage lenders look at several considerations when assessing to lend money to someone with a bankruptcy on his/her credit bureau. They look at how long ago the bankruptcy occurred and usually require an explanation of the events leading up to the financial problems. Lenders are also concerned with the length of time since discharge. High up on the list are the applicant’s reasons why he/she is going to stay clear of financial woes in the future. Finally, the lender wants to see that the client has re-established credit. But this requirement begs the question: how do I re-establish my credit when I have a bankruptcy on my report card? Won’t a creditor run a check every time I apply for plastic or a loan?
The answer to that question: “Yes.” But just as your financial problems were not created overnight, it only stands to reason that they will not be solved in the space of one day. You need to baby-step your way along the path of financial recovery. Here are a few helpful tips. Apply for a credit card with a small limit, even as low as $200. The goal is to use the card (but do not go over the limit) and pay it off every month. After perhaps 3- months, call the card issuer and ask for an increase. Another option is to get what is called a secured card. This is not like a line of credit which is secured against a property; instead, the lender issues a credit card in return for the borrower depositing a sum of money equaling the credit limit on the card. For example, the borrower may opt to deposit $500 with the lender who in turn issues a credit card with a $500 limit. Here again the strategy is to use the card and make payments – on time, of course! This credit activity helps re-develop credit and causes the beacon score to rebound. This score, or what it represents, is key to most lenders guidelines on lending mortgage money to previously bankrupt clients.
Bankruptcy policy on mortgage lending is as varied as the lenders themselves. There are a few lenders who will finance clients who have not been discharged their personal bankruptcies. If you would like to refinance your principal residence or purchase with a 25% down payment, there may be a private investor willing to provide some mortgage financing. If you have a 15% down payment (gifted or borrowed) you may likely qualify for a mortgage after being discharged for only 1 day. No re-established credit is necessary.
But, as previously mentioned, you usually need to be discharged for at least 2 years and have some rebuilt credit over the period of a year, especially if you would like to purchase with only 5% down. You will be looking at paying a rate of 8%. But that beats paying expensive rent in a rising market, I think. In so far as the 5 major banks are concerned, they usually require that the client be discharged for 3 years and then have 2 years of re-established credit. And you can get the same good rates as someone who did not have any credit issues in the past.
I want to say that I have seen clients claim bankruptcy and then make a spectacular comeback 3-4 years later. So don’t give up. (Remember that failure is not in the fall, but in the unwillingness to try again). And keep in mind that a good mortgage agent can help speed up the financial recovery. After all, we are the lending experts. We understand the lender’s mindset in viewing former bankrupt applicants; we have helpful tips and we have access to lenders who are willing to give someone a second chance.
Please feel free to call or email with any questions that you may have.
Wendy Goodsir
403-540-6244
