Tips for Buying a Home with Bruised Credit
Filing for bankruptcy, or filing a consumer proposal, is often one of the most significant financial decisions you can ever make. And, similarly, buying a house is likely to be the largest financial transaction you’ll ever make.
However, it’s a common misconception that one cancels out the other, and that filing for bankruptcy, or having a consumer proposal on your record, automatically cripples your chances of ever owning a home.
In fact, even with bruised credit due to bankruptcy, or a consumer proposal, there are several ways you can improve your credit score and increase your chances of securing a mortgage to purchase a home.
How Consumer Proposals and Bankruptcy Affect Your Credit
With a consumer proposal, an R7 – one of the lowest possible ratings – will be added to your credit report.
The R7 will remain on your credit report for the duration of your consumer proposal, and even after the proposal is paid off.
In fact, a consumer proposal remains on your credit report for an additional 3 years after completion of the consumer proposal.
With bankruptcy, the impact is more severe. For a first-time bankruptcy, an R9 rating will appear on your credit report for six years after the date of the discharge from bankruptcy.
This means, if your bankruptcy period was 9 months, the R9 would remain on your credit report for six years and nine months.
If you file for bankruptcy a second time, it will remain on your credit report for 14 years after discharge.
Can You Get a Mortgage after Bankruptcy or Consumer Proposal?
Some good news is that despite resulting in bruised credit, having filed for bankruptcy or a consumer proposal does not prevent you from buying a home.
It may take a bit of time and work, but with some patience, you can build up your credit rating in order to secure a traditional bank mortgage.
Plus, with private and alternative lenders that are often willing to offer mortgages to higher-risk borrowers, securing a mortgage with bruised credit is a possibility.
Factors Lenders Look at When Considering You for a Mortgage
While credit history is an important consideration, it’s not the only factor that lenders look at when considering you for a mortgage.
The following factors are also considered when reviewing your mortgage application:
- Employment history
- Debt-to-income ratio
- The size of your down payment
- Collateral and guarantees of other purchasers, such as a spouse
- Capital – savings, investments, and other assets that can help repay the loan
The lender will weigh the above factors to determine your eligibility for a mortgage along with which rates and terms you qualify for.
While typically, a score of 720 to 900 is considered the very good to excellent range, people with a credit score of 620 or higher still have a good chance of being approved for a loan with competitive, lower interest rates and favourable terms.
Tips for Improving Your Credit Rating Before Buying a House
To help counter the negative effects that a consumer proposal or bankruptcy has on your credit report, you will have to find ways to improve your credit score in other areas.
Here are some examples of things you can do to increase your credit score.
Pay Down Debt
The amount of debt you owe compared to your total available credit – also known as credit utilization – is a significant factor when calculating your credit score and accounts for 30% of your overall rating.
Therefore, if you have not yet completed a consumer proposal or have accumulated additional debt after paying it off or being discharged from bankruptcy, it’s crucial that you focus on paying off that debt.
Don’t Obtain Too Much New Debt
Once you have completed your bankruptcy or consumer proposal, try to avoid taking on excessive amounts of debt to prevent yourself from slipping back into old habits and getting in over your head.
However, you will need to obtain some credit to help maintain your credit history and build a record of responsible credit use. To improve your score, try not to use more than 30% to 40% of approved credit limits.
Which brings us to our next point.
Get a Secured Credit Card
A secured card is a credit card that requires you to put down a deposit – usually the same amount as your credit limit – and helps to build positive credit history.
The deposit is held as collateral in case you miss your payments.
But, depending on the agreement with the creditor, after a certain amount of time and good repayment history, the funds you have deposited may be returned to you, and the secured card will become an unsecured credit card.
Don’t Miss Any Payments
Payment history makes up 35% of your overall credit rating, so ensuring that you are making all payments on any debt you have is crucial.
In fact, past missed payments stay on your credit report for 6 years, so it’s important not to miss any payments to avoid any hits to your credit score.
Don’t Close Old Accounts
When trying to improve your credit score, it can be tempting to close out old credit accounts to avoid feeling tempted to use them. However, doing so can have a negative impact on your credit score.
The reason for this is that lenders look at the length of your credit history.
Therefore, it’s important to hold onto these credit accounts and use them every so often – but pay them off each month. This will show some activity on your credit profile and help build a positive credit history.
Neither a consumer proposal, nor bankruptcy, come with a life sentence of financial strain and credit problems. It may not feel like it at the time, but there is a light at the end of the tunnel. Indeed, the purpose of consumer proposals and bankruptcy is to give Canadians a fresh financial start!
With a bit of work and some patience, you can work towards rebuilding your credit, put the past behind you, and achieve your goal of becoming a homeowner.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!