A consumer proposal helps thousands of Canadians recover from financial hardship and gives them the chance to rebuild their credit.
But how do you qualify for a mortgage after a consumer proposal discharge?
While a consumer proposal does impact your credit score, you can resolve unmanageable debt and rebuild your credit to give yourself the best chance of mortgage approval.
Getting a mortgage after a consumer proposal
Can you get a mortgage after completing a consumer proposal? Well, the good news is you can, but it takes some work.
Before considering a mortgage application, you must take steps to repair your credit score to give you the best chance of success.
Here are some tips for getting a mortgage after a consumer proposal:
1. Pay your consumer proposal quickly
Firstly, 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.
You are not required to make additional payments if you don’t want to, and your monthly payments will never increase, even if your income increases.
When applying for a mortgage, lenders consider how much debt you have. Your debts are eliminated by completing your consumer proposal, which is one less problem to worry about.
2. Get a Certificate of Full Performance
When you finish your consumer proposal, you receive a Certificate of Full Performance, officially releasing you from your obligation to repay the remaining balance of your unsecured debts outlined in your proposal.
This proves that you completed your consumer proposal successfully, so make sure you supply this to prospective mortgage lenders.
When you do this, it usually results in a slight improvement to 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. Therefore, 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Regularly check your credit report for errors, as incorrect or outdated information can harm your credit score.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 that have been eliminated through your proposal.
Make sure accounts that were included in your consumer proposal are not being reported as bankruptcy, and that they 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.
See also: How to read a credit report
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.
Your credit history is the third most important factor when calculating your credit score, accounting for 15% of your total credit score calculation.
Establishing a good credit history demonstrates that you can manage credit accounts over a long period of time.
- Aim to add two new lines of credit, like a credit card or a loan, totalling at least $2000.
- Try to use less than 30% of your available credit to ensure a good credit utilization ratio.
- Lenders want to see that you’ve managed these new lines of credit successfully 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 a mortgage is better than just having a single type of credit, such as credit cards.
You want to indicate to lenders that you are a responsible borrower who can manage different types of credit.
You will establish a positive credit history by managing these accounts responsibly, and your credit score will improve.
Some credit card issuers offer cards designed for people looking to improve a low credit score. However, these cards tend to have higher interest rates.
While you are in a consumer proposal, start by applying for a secured credit card. A secured is the same as a regular unsecured credit card, except you must put down a cash deposit and pay an annual fee.
You have to make repayments just like a regular credit card. All activity is reported to the credit bureaus, which will improve your credit score.
6. Make payments on time
Making payments on time has the most impact on your credit score.
When you consistently make repayments when they are due, your credit score will rise. And when potential mortgage lenders see this on your credit report, they feel confident that you can keep up with your mortgage payments.
All lenders want to see that you can borrow money and pay it back on time. When you don’t, the credit bureaus are notified through a series of credit ratings containing a letter and a number, which refer to the type of credit and the regularity of payments.
The best rating is 1, and the worst is 9. Anything higher than a 1 can hurt your credit score.
Payment history is recorded for all financial products you use, so that’s why you need to pay every bill on time. Even missing a utility bill payment can damage your credit. Using automatic bill payments or reminders for payments can ensure you avoid getting into trouble.
If you have debts in collections, it is more than likely that you will have the worst possible rating for that credit account.
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 you have used $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 positively impact your credit score.
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 out over your other accounts.
- Add more lines of credit, which will increase your total amount of available credit.
8. Save money for a down payment
You’ll want to have a large 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.
You should also consider mortgage default insurance, which could lower your mortgage interest rate.
9. Find a suitable mortgage
A mortgage is one of the most significant decisions you will make in your life, 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. A credit score of at least 600 is required before considering a mortgage with a prime lender such as a bank.
Anything below this score will make it extremely difficult and likely means that you will only apply for a subprime mortgage.
Prime lenders such as banks are wary of offering loans to people with poor credit, so you will be limited to alternative and private lenders offering subprime mortgages for the first couple of years after completing a consumer proposal.
It is possible to qualify for a subprime mortgage, but the interest rate will be much higher (at least 20%) than a traditional mortgage because the lender is taking a risk on someone who has poor credit. Your down payment will also be higher.
While you have poor credit, you will be limited to these alternative lenders. If you can wait, take time to rebuild your credit score and save money for a down payment to get a better deal.
To benefit from the lowest rates and favourable terms with prime lenders, you must rebuild your credit score to be within the 600-700 range.
What is a good credit score? According to Equifax, credit scores from 660 to 900 are generally considered good, very good, or excellent.
10. Consider a mortgage broker
If you want some professional advice, consult a mortgage broker to help you find the best mortgage for your circumstances.
Can I get a mortgage during a consumer proposal?
While in a consumer proposal, you’ll be refused a mortgage, but don’t despair. Dealing with your debts through a consumer proposal is the first step towards qualifying for a mortgage.
Entering into a consumer proposal can positively impact your life, allowing you to make one affordable monthly payment towards your unsecured debt and freeing up money to save for a future mortgage.
Once you have completed your consumer proposal, you’ll be in a much better position, and your chances of getting a mortgage will increase.
Then, you can use the money you’ve saved as a down payment once your credit score has improved sufficiently.
How soon after a consumer proposal can I get a mortgage in Canada?
After finishing your consumer proposal, you will not be eligible for a mortgage with a prime lender for the first two years.
Mortgage lenders will want to see a good credit history over two years from the completion of a proposal.
You can do this by adding at least two lines of credit worth at least $2000 during or after your consumer proposal. You must manage these successfully for two years while using less than 30% of the available credit.
By doing so, you can also improve your credit score to an acceptable level during this time.
You must also follow the steps above to give yourself the best chance of being accepted for a mortgage in the future.
How does a consumer proposal affect your mortgage?
A consumer proposal will be noted on your credit report for three years after its completion or six years from the date you filed (whichever comes sooner).
During this time, this note on your credit file will affect your chances of getting a mortgage. Lenders use your credit report and credit score to measure the likelihood of you being able to pay back what you borrow.
Having a consumer proposal on your credit report tells prospective mortgage lenders that you are using a consumer proposal to deal with outstanding debts. As a result, it’s a good idea to wait until your consumer proposal has dropped off your credit report before applying for a mortgage.
If you want it to drop off faster, you can pay more towards your consumer proposal for an early discharge.
Mortgage versus income: do I qualify for a mortgage in Canada?
To qualify for a mortgage, you must prove to a mortgage lender that you can afford it.
The first step is to check your credit report and ensure there are no errors, as this is one of the first things a lender looks at.
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) by 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.
It is harder to get a mortgage after a consumer proposal, but dealing with unmanageable debt should be your priority. A mortgage is achievable once you’ve completed your consumer proposal and improved your credit.
Through a consumer proposal, you will be able to eliminate your debts and rebuild your credit, giving yourself the best opportunity to be accepted for a mortgage later on and securing your dream home.
If you have questions about a consumer proposal, connect to a Licensed Insolvency Trustee today.
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