For many Canadians, buying a home of their own is a major life goal. This dream might feel out of reach for a variety of reasons, but filing a consumer proposal or bankruptcy shouldn’t be one of them.
It’s a common misconception that filing for bankruptcy or a consumer proposal will prevent you from getting a mortgage. In reality, being proactive about your debt is the best path to future homeownership.
How can having debt affect getting approved for a mortgage?
Banks and other mortgage lenders take many factors into consideration when deciding to approve an individual for a mortgage including assets owned, income, debt, and credit history.
With respect to debt, your outstanding amounts, length of loans, and debt-to-income ratios are all factors that lenders take into consideration when assessing your mortgage eligibility. If debt levels are too high, or debt ratios do not meet the lender’s standards, then the lender may decline your application. Also, if you only make minimum payments towards your debt, this can drastically affect the kind of mortgage you can receive.
Ultimately, if you have debt, getting approved for a mortgage may be a difficult task, and if you are unable to make payments that reduce the principal debt, the problem may follow you.
How do bankruptcies and consumer proposals affect debt?
Both bankruptcies and consumer proposals are legal processes that allow an individual to pay back a lower percentage of the debt they owe over an agreed amount of time. For a first-time bankruptcy, the process can last either 9 or 21 months depending on income. A consumer proposal, on the other hand, typically takes 5 years to complete, though it can be paid off at any time. Both bankruptcy and a consumer proposal provide a person with the opportunity to be debt-free after a set amount of time, rather than remaining trapped in the endless cycle of minimum payments.
But, don’t bankruptcies and proposals affect your credit?
Any formal insolvency filing (e.g. bankruptcy or consumer proposal) will have an effect on one’s credit rating. In Ontario for example, where I am a Licensed Insolvency Trustee, credit is affected for the length of the bankruptcy and will show on a credit report for another six to seven years after discharge (only six in some other provinces). A consumer proposal will be removed from a credit report three years after the proposal has been fully performed. So, while there will be an impact on your credit history, it won’t be forever and will at most delay your ability to be approved for a mortgage at a regular interest rate.
Could filing a bankruptcy or a consumer proposal benefit you in buying a home?
While both processes certainly do have an impact on credit, they provide a light at the end of the tunnel. Rather than continuing to pay minimum payments and never moving forward, a formal insolvency process provides you with a financial fresh start. Once the insolvency process is complete, rebuilding credit can occur without the baggage of old debt, bettering your creditworthiness in the eyes of banks and other lenders.
Can someone who has filed for bankruptcy or a consumer proposal be approved for a mortgage?
Yes, but your approval will be based on your creditworthiness and spending behaviour once you have been discharged from bankruptcy or completed your consumer proposal and have been issued your certificate of full performance. To help set you up for success, everyone who files a consumer proposal or bankruptcy is required to participate in two financial counselling sessions. Our certified counsellors can offer insights and advice on how to rebuild your credit and establish smart spending habits so that you can become an eligible mortgage candidate.
When should you seek professional advice?
Seek advice as soon as you have any questions about your debt or are thinking about purchasing a home while carrying personal debt. The great news is that a consultation with a Grant Thornton Licensed Insolvency Trustee is free and requires no commitment after the fact. If you find yourself questioning whether you are ever going to be able to pay off your debts and achieve your dream of homeownership, reach out to our team any time for prompt, accurate, and helpful advice.