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The Minefield of Mortgage Financing After Bankruptcy

When a person declares bankruptcy the Office of the Superintendent of Bankruptcy notifies the credit bureau. This information stays on a credit bureau report for 6 - 7 years. You can start to re-establish your credit by doing the following:

•    Talk to your banker and say you want to re-establish your credit rating;

•    Open a savings account;

•    Be a regular and persistent saver.  Use the common techniques I am sure you have heard of: 

  1. Pay yourself first; 
  2.  Take your next raise and save it;
  3. Save 5 % of your pay; 
  4. Have your savings come right off your pay and into a separate savings account; 

•    Take out a small loan using the savings account as collateral, and then pay it back;

•    Apply for a secured credit card. Using a secured credit card is a quick way to rebuild your credit rating.  As you make regular payments your credit history looks better and better;

•    Pay your credit card balances on time.

Bankruptcy Canada Tip
The consumer has a right to place a
100 word statement (50 recommended)
on the credit bureau file, to be given
to anyone who obtains a future report.

Understanding mortgage financing is tricky at the best of times and certainly becomes more difficult after you have declared bankruptcy.  The best way to navigate through the minefield is to understand how mortgage lenders think and what they look for.  All institutions that lend money are primarily worried about one thing… risk… and will they be paid back the money.  In their eyes a person who has been previously bankrupt poses a higher risk than a person who has not.  This does not mean that you cannot obtain a mortgage after bankruptcy, but there are some things that need to be done and some pitfalls you should not fall into.

Most lenders are reluctant to consider financing until after you have been discharged from bankruptcy for 18 to 24 months.

Equifax and Trans Union credit bureau reports are of great importance to a lender and that is one of the first things they look at.  What is your credit score and what does your past credit history look like?  A bankruptcy will stay on your credit bureau for 7 years. A second bankruptcy will trigger the first one to show on your Trans Union credit bureau report even though the first bankruptcy was discharged 7 or more years earlier.  Lenders will not consider mortgage financing if a double bankruptcy situation shows on the credit bureau report.  In the case of a double bankruptcy, lenders will agree to finance only if the most recent bankruptcy was discharged  7 years earlier. 

After discharge from bankruptcy you should check your credit bureau report to ensure that all items included in the bankruptcy are reflected on your report.  Some institutions do not report correctly and this can give you an artificially low score and could potentially prevent you from obtaining credit of any kind or paying a higher interest rate than you need to.  A copy of your credit bureau report can be acquired  from Equifax or Trans Union.  If there are some errors, you can show your bankruptcy papers to the credit bureau and they will make the corrections for you.  Once this is done it usually takes about 3 months for your score to improve.

Some credit needs to be established after bankruptcy.  This can be accomplished by obtaining a secured visa, an auto lease, an auto loan, etc.  Most lenders like to see two credit items that have been reporting for 12 - 24 months.  It is vital that you never make a late payment after the bankruptcy.

We see a situation quite often with couples where only one has some credit showing on his or her bureau report, for example, a car lease.  An easy way to establish credit for the other person is to make the lease joint.  The payments will begin to show on both credit bureau reports without having to increase the amount of credit.

To be considered for mortgage financing after bankruptcy you would need to have been discharged from bankruptcy for a minimum of 12 to 18 months with a one year history of good reestablished credit since the discharge date. 

If you have had a mortgage foreclosure included in your bankruptcy and this shows on your credit bureau report, you will have to wait 7 years for this to disappear from the report.  The other trouble area is student loans.  You cannot include a student loan in a bankruptcy.  If a student loan goes to collection, a lender will want the collection paid in full prior to agreeing to financing.  This would obviously be a very difficult thing for most people to do.  It is therefore important to maintain student loan payments.

There is the possibility of getting a mortgage after you have been discharged from bankruptcy, but the best way to get to that goal is to think like a mortgage lender and understand what to do and probably more important… what not to do.

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