Buying a Home after Bankruptcy?

If you’ve declared bankruptcy in the past, know that you’re not alone.  Further, know that your situation is nothing to be ashamed of.  No one wants to declare bankruptcy; sometimes, it may be the only solution to a difficult situation.  If you’re now thinking of buying a home after bankruptcy, you may be wondering how it would work.

I see lots of clients after their bankruptcy has been discharged or their consumer proposal has been completed. It’s very common to hear that they’ve dropped in at their bank branch or another mortgage broker, and they have either been turned down or found that their calls for information don’t get returned. (Pet peeve alert!)  This may give the mistaken impression that there is nothing to be done.  Don’t be discouraged!  You can and will put this behind you, with the right planning and commitment.

You CAN get a mortgage after bankruptcy. Here’s what you need to know.

You do need to be aware that buying a home after bankruptcy is not the same as buying a home for the first time with no credit issues. There are two main factors:

• How long ago was your bankruptcy discharged, or your consumer proposal completed?
• How long have you been re-establishing your credit, and how extensive is that credit?

The mortgage options available to you depend on the answers to these questions.  In a nutshell, you will be looking at either a mainstream or alternative lender.

Mortgage after bankruptcy with a mainstream or “prime” mortgage lender

With a prime lender, you will have the luxury of being able to purchase a home at the best rates available. In addition, a mainstream lender will allow you to use a down payment of as little as 5% of the purchase price of the home.  One thing to note: if your down payment is less than 20% of the home’s purchase price, lenders will require default insurance through either CMHC or Genworth; the fee charged will be added to your mortgage amount (the cost is calculated on a sliding scale: 1.80% – 3.60% of the amount of your mortgage).

In order to qualify with a prime lender after bankruptcy, you need to fulfill the following criteria:

1.  The down payment must be from your own resources – either in a savings account, an RRSP, investment account, and so on.   As of February 16, 2016, you need to have at least 5% available for the first $500,000 of your purchase, 10% for any amount over $500,000.   However, 10% of the purchase price is better, and will give you more options.

2.  To work with a prime lender, you need to wait for a minimum of two years after discharge of your bankruptcy.  Please note that this is a best case scenario, not a sure thing.  Each lender has their own criteria.  A few will do a mortgage two years after, several more require three years, and some want you to wait five or six.

3.  To work with an “A” lender after bankruptcy, you must also be able to show at least two years of solid, re-established credit.  A little more about this point…  As soon as your bankruptcy is discharged, you should be focusing on rebuilding your credit.  Ideally, what you want to end up with, is a two year track record, minimum, on each piece of credit (also known as a “trade line”) you have.  The credit can be made up of two major credit cards with a limit of  at least $2000-3000 each, an unsecured line of credit with at least a $2000 limit, a loan or car lease, or some combination of those.  Unsecured credit is best, and you need to have at least two trade lines.  Every single credit transaction following your bankruptcy has to be absolutely perfect.  Make your payments on time, and in the case of credit cards and lines of credit, keep your balance at a maximum of 30% of the limit on the card.  

Mortgage after bankruptcy with an alternative mortgage lender, or “B” lender

An alternative lender will work with you as early as one day after your bankruptcy discharge, and with little or no re-established credit.   However, in exchange for this flexibility, what they will look for is the following:

1.  Your down payment will need to be at least 15% of the purchase price of your home.  If you have 20-25% down, that will give you more options.  

2.  Your costs will be higher with a “B” lender than with a mainstream lender.  First, your interest rate will be a bit higher; how much higher depends on the “big picture” of your overall financial situation, how large your down payment is, and how good your re-established credit is.  You can expect to add at least one percentage point over mainstream rates, possibly more.  Second, you can expect to pay a lender commitment fee – typically around 1% of your mortgage value – similar to the Genworth or CMHC mortgage insurance fee mentioned above.  If your down payment is more than 20%, you might be able to add the commitment fee to your mortgage rather than paying this out of pocket, but this is up to the lender.

3.  You’ll need to obtain a full appraisal before the lender will sign off on the mortgage.  This means that if you’re buying a home after bankruptcy, when you’re writing up your Offer to Purchase, you need to include enough time in your “financing clause” to allow for the appraisal to be conducted, written up, and reviewed by the lender.  Ideally, you should have at least a 5 business day financing clause.

Keep in mind that your alternative mortgage lender or B lender is exactly that: an alternative, or a stepping stone to get you where you want to go.

If you focus on rebuilding your financial situation and improving your credit, usually in 1-3 years you can move back into mainstream territory.

Discuss your options with a mortgage professional

If you do wish to purchase a home, and you have a bankruptcy or consumer proposal in your past, the most important recommendation I have is not to rush into anything.  Same goes for re-financing a mortgage after bankruptcy.  Talk to a knowledgeable mortgage professional who is experienced in helping people get a mortgage after bankruptcy so that you can understand and evaluate your options, and figure out which one is best for you.