What is bankruptcy?
Bankruptcy allows a person to wipe out most of all existing debt and start fresh. It can be a very long and complicated process that should only be used as a last resort. Even though it might bring peace of mind, it comes with challenges to anyone who wants to purchase a property in Calgary unless they speak to an experienced mortgage professional.
For nine months, everything a person owns is surrendered to a trustee in bankruptcy, and all surplus income is paid to that trustee during this time. In most cases, the client is discharged after nine months, and can start building their credit right away.
In order to get a mortgage after bankruptcy, the first and most important goal is to restore credit. A common misconception is that borrowers think they must wait seven years before they can start applying for credit – this is simply not true; they can start right after the nine month discharge. Another misconception is that borrowers think they can get a mortgage as soon as bankruptcy is declared. In most cases, the person must wait at least 2 years after the discharge for a lender to consider loaning them money. During this time, the borrower must start rebuilding their credit.
Rebuilding Credit After Bankruptcy
1) Check your credit report: When a borrower files for bankruptcy, it shows up on their credit report from Equifax and TransUnion. It is essential the borrower checks to make sure the bankruptcy shows no balance owing after the discharge, or this will slow the rebuilding process. If the report does, it is a matter of filling out the proper paperwork, attaching the letter of discharge, and sending it in. A mortgage professional should be able to help the borrower with this.
2) Obtain a credit card: It may be hard to obtain credit from ‘A’ lenders, so a mortgage professional can help set up a secured credit card where the borrower provides a deposit to the lender; ideally $1500. The lender will deposit this into a GIC and holds the money for a full credit card.
3) Be diligent: Once the credit is set up, it is absolutely imperative the borrower does not fall behind in payments because this would certainly inhibit the chances of obtaining mortgage financing in the future. Take steps to prevent that from happening such as setting a reminder in the calendar on a mobile phone, or set up an automatic bank withdrawal a few business days prior to the due date.
Common Misconceptions:
1) You must wait 7 years after bankruptcy to obtain credit. You can actually start applying for credit once you are discharged, which is typically a nine month period. Your credit report will show the bankruptcy for 7 years, but you don’t need to wait that long to obtain mortgage financing. It will be difficult to get an excellent rate at the bank, but a savvy mortgage professional can still provide a competitive rate with a credit union or an alternative lender.
2) Once you declared bankruptcy, you can obtain mortgage financing. You must be discharged first (which takes 9 months), then build your credit. Most lenders won’t consider your application unless 2 years has passed since your discharge.
3) Paying rent and parking tickets on time improves my credit. Wrong. These payments do not get reported on the credit report, therefore it does not improve your score.
Important Steps To Take After Bankruptcy:
1) Ensure all tradelines on the credit report with Equifax and TransUnion are wiped clean after discharge
2) Get set up with a secured credit card. Even if you can afford $500, it’s the right step to establishing your credit score
3) Do not miss or be late with any payments. This will have a negative impact on the credit score and make it extremely difficult to obtain mortgage financing in the future
For those who have foreclosed on a property in a bankruptcy, they may find it more difficult to obtain mortgage financing after, so it’s important to take measures to prevent that from happening.
Coming out of bankruptcy is not a difficult process if a borrower knows the right steps to start establishing credit; it just takes time and diligence. With the right information, guidance, and education, a mortgage professional will be able to help the borrower get back on the path to home ownership.
