A consumer proposal helps thousands of Canadians recover from financial hardship, but how do you qualify for a mortgage after a consumer proposal?
Before considering a mortgage application, most lenders want you to complete your consumer proposal and repair your credit first.
A consumer proposal affects your credit rating
A consumer proposal is noted on your credit report for at least three years after completion, lowering your credit score.
Mortgage lenders use your credit report to measure the likelihood of you being able to pay back what you borrow. A consumer proposal tells lenders that you need help with your debts, affecting your mortgage prospects.
How long after a consumer proposal can I get a mortgage?
After finishing your consumer proposal, you won’t be eligible for a mortgage with a prime lender for the first two years.
Most mortgage lenders, including mainstream banks and the CMHC, only approve applications with good credit history for at least two years after completing a consumer proposal.
You must actively rebuild your credit history during this time, adding new lines of credit and fixing reporting errors on your credit report. Add at least two new lines of credit, such as a loan or credit card, with limits of at least $2000 each.
You also need a minimum down payment of 20%, or you will need a high-ratio mortgage.
How to get a mortgage after a consumer proposal
1. Pay off your consumer proposal early
The sooner you pay off your consumer proposal, the sooner it will drop off your credit report, meaning you can rebuild your credit faster.
A consumer proposal is very flexible. You can complete it as quickly as your finances allow, either by making additional monthly payments or paying a lump sum.
2. Get a Certificate of Full Performance
Upon completing your consumer proposal, you will be issued a Certificate of Full Performance, which officially releases you from any remaining debt obligations outlined in the proposal.
This proves that you completed your consumer proposal, so supply this to prospective mortgage lenders.
You’ll also want to send your certificate to Equifax and TransUnion (the main credit bureaus), so they can ensure your proposal is marked as discharged on your credit report.
When you do this, it often results in a slight improvement in your credit score.
3. Check your credit report for errors
When you apply for a mortgage, a lender will review your credit report as part of the decision-making process. You must make sure it’s accurate.
Regularly check your credit report for errors, as incorrect or outdated information can harm your credit score.
Once your consumer proposal is finished, your credit report should display no balances for the debts eliminated through your proposal.
Make sure accounts included in your consumer proposal are not being reported as bankruptcy and show no owed balances, late payments or collections.
If you spot incorrect personal or account information, ask the credit bureaus to update or fix these issues.
4. Add new credit to improve your credit history
Traditional mortgage lenders look at your credit history to assess whether or not they should accept your application. They are more inclined to look at how you manage new credit, so try to add new credit facilities to improve your credit history.
Establishing a good credit history demonstrates that you can manage credit accounts over a long period.
- Aim to add two new lines of credit, like a credit card or a loan, with limits of $2,000 or more on each.
- Use less than 30% of your available credit to ensure a good credit utilization ratio.
- Lenders want to see that you’ve successfully managed these new lines of credit for two years after completing your consumer proposal.
- Only borrow what you can afford, look for reasonable rates and don’t make too many applications at once.
5. Add different types of credit
Having a variety of credit, like a credit card, car loan, and mortgage, is better than just having a single type of credit, such as credit cards.
6. Make payments on time
Making payments on time has the most impact on your credit score. This gives lenders confidence that you can make your mortgage payments.
Paying your bills on time is vital for maintaining a good credit score. Even one missed payment can indicate to lenders that you are a credit risk.
7. Improve your credit utilization ratio
Your credit utilization ratio is the percentage of your used credit vs the total credit available on your financial products. So, if you have a credit card with a $2,000 limit and use $500, your credit utilization on this card is 25%.
Keeping your credit utilization ratio below 30% of your available credit is a fast and simple way to impact your credit score positively.
Some tips to improve your credit utilization ratio:
- Make larger monthly payments to pay down your balances.
- Increase your available credit.
- If you are near your limit on one line of credit, spread this balance over your other accounts.
- Add more lines of credit, increasing your total amount of available credit.
8. Save money for a down payment
You’ll want a sizeable down payment to benefit from a better interest rate, so save money during your consumer proposal to ensure that you have the funds required to make a mortgage application.
Most mortgage experts recommend you have at least a 20% down payment when applying for a mortgage after a consumer proposal.
9. Find a suitable mortgage
A mortgage is one of the most significant decisions you will make, so you must thoroughly research your options. To be accepted for a traditional mortgage, you must increase your credit score to an acceptable level before you apply.
To qualify for the best mortgage terms with the best lenders, you need a credit score of 600-700. Anything below that often means you only qualify for a subprime mortgage.
Banks are hesitant to give loans to people with bad credit, so you will likely have to get a subprime mortgage from an alternative or private lender.
A subprime mortgage is available to those with poor credit but at a significantly higher mortgage rate (at least 20%) than a traditional lender. The down payment is also higher.
While you have poor credit, you will be limited to these alternative lenders. Take time to increase your credit score and save money for a down payment to get a better deal.
10. Consider a mortgage broker
If you want professional advice, consult a mortgage broker to help you find the best mortgage for your circumstances.
Can you refinance your mortgage to pay a consumer proposal?
If you have enough equity, you can often refinance your home to pay a lump sum towards your consumer proposal, which allows you to complete it sooner.
Your lender will review your existing mortgage, credit score and the reasons for filing the consumer proposal before they agree to refinance.
You can rebuild your credit faster by refinancing your mortgage to pay off your consumer proposal. To learn more, talk to your Licensed Insolvency Trustee.
How much of a mortgage can I afford?
To qualify for a mortgage, you must prove to a mortgage lender that you can afford it. As part of the decision process, lenders will review your:
- Estimated monthly property costs
- Credit report.
Your mortgage lender will use some calculations called debt service ratios to decide if you can afford to buy a home:
- Gross Debt Service (GDS)
- Total Debt Service (TDS)
You can estimate your Gross Debt Service (GDS) and Total Debt Service (TDS) using the CMHC’s debt service calculator.
When calculating your GDS ratio, your total monthly household costs shouldn’t exceed 32% of your gross household income.
Your TDS ratio uses the same calculation, but the lender will also include any other monthly payments you need to make, such as any debt repayments. Your TDS should be less than 40% to ensure you afford a mortgage.
A consumer proposal lets you clear your debts and improve your credit score faster.
By rebuilding your credit history, adding new lines of credit and fixing errors on your credit report, you will likely be accepted for a mortgage.
If you have questions about a consumer proposal, connect to a Licensed Insolvency Trustee today.
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