Getting a mortgage after a consumer proposal? 7 tips
If you’re like most people, getting a consumer proposal feels like a big relief at first. You want to get this thing done and then move on with your life. But the moving on can become very frustrating because potential new creditors, such as when you want to get a mortgage to buy a home, or refinance your existing mortgage, don’t necessarily trust that you’ve turned the corner with your finances.
Here’s how to get the best deal on a mortgage after consumer proposal:
Tip # 1 – pay all your monthly obligations religiously
I’ve seen mortgage applications get rejected by mainstream lenders after a consumer proposal, because of just one recent late payment. (By “recent”, I mean in the last 12 months or so.) Do not let this happen to you! Set yourself up to auto-pay at least the minimum payment on every single bill you have. In particular, don’t miss any payments on your existing mortgage if you have one, your consumer proposal payment schedule, and any credit cards, loans, or auto leases. Your cell phone bills show up on your credit report too, so no matter how much we hate them for charging us too much in Canada, don’t add problems for yourself by being late in paying that bill.
Tip # 2 – pay off the consumer proposal as quickly as possible
Pretty much any lender will want you to pay off the consumer proposal before they will give you a mortgage, with the possible exception of private lenders (although they would potentially increase the rate they charge you because of the added risk). The alternative lenders (aka “B” lenders) do allow you to get a mortgage soon after the consumer proposal is discharged, and may even consider a re-finance to help you pay off the proposal. But, the rate they charge is better if the proposal is a year or two in the past. Meanwhile, the mainstream lenders require you to wait at least two years after the consumer proposal is paid off, sometimes more. So you can see that it is in your favour to pay the proposal off as quickly as you can. The sooner you get it paid, the sooner you can move on with getting a good deal on your mortgage.
Tip # 3 – clear off any lingering collections or unpaid debts
If you have debts that were not included in your consumer proposal, get them paid as soon as possible. And, make sure you get a receipt or some written proof of payment in full. If they were paid, but still show on your credit bureau, send that proof in to the credit reporting agencies (in Canada, they are Equifax and TransUnion) so that the information can be updated. Mortgage lenders are nervous about unpaid debts because they don’t want a surprise judgement to be made against you, which could impact the affordability of the mortgage and/or be registered as a lien against your property.
Tip # 4 – beef up your down payment
After your consumer proposal is paid off, you will have two main options in getting a mortgage, the alternative lender route, and the mainstream lender route.
The alternative lender route
The alternative lenders will consider approving your application for a mortgage soon after your discharge, as long as your past debts are fully cleared and you are starting to re-establish credit. If you’re looking to re-finance your existing mortgage, it’s even possible that you could use part of the funds to pay off the proposal. The tradeoff? By lending to you before your credit is triple “A”, the alternative lenders are doing something that is considered more risky. To offset this risk, they want you to have more skin in the game. So, if you are purchasing a property, they will ask for at least 15% down, more likely 20% down (and 25% or more if you want to buy a condo). On a re-finance, most will not give you more than 75% of your home’s value, although if your overall financial picture is strong and your home is super marketable and in an area like Toronto, Oakville, Etobicoke, or Mississauga, some lenders will go up to 80% on an exception basis.
The mainstream lender route
The mainstream lenders are obviously more attractive, because the rates are better, the terms are (somewhat) more flexible, and you can typically purchase a home with less than a 20% down payment. However, you need to know that it is unlikely that you will be approved for a purchase with 5% down until every last late payment has disappeared from your credit bureau. So shoot for at least 10% or more to put against your property purchase, and if you can do 15% – 20%, even better. And note that the mainstream lenders want this payment to be coming from your “own resources”, i.e. your own savings, when you have a consumer proposal and/or written-off debts showing on your credit record. If you’re planning on getting part of your down payment with some help via a gift from your parents or that kind of thing, get it into your account now. Eventually you will need to show 90 days’ worth of bank or investment account statements, to prove that you have the down payment and closing costs in your account. Having the money in there months in advance, with no unusual large deposits showing in the 90 day time frame, will prove that this money is yours.
Tip # 5 – make your credit perfect
Your goal should be to get your credit rating above 700. But the rating isn’t the only thing that is important. Mortgage lenders want to see at least two significant “clean” credit facilities on your credit bureau. This includes major credit cards such as a Visa or MasterCard, as well as a car lease or loan, or sometimes even an RRSP loan, as long as it reports to the credit bureau. I have written quite a bit about re-establishing credit on my site, so I won’t duplicate that here.
Two key items I do want to stress:
- Mortgage lenders want to see no late payments on anything, no matter how small. All your old late payments, if they are still showing up on your credit, should be way back in the past.
- With your current “clean” credit cards, your balance should never exceed more than 30% of the limit. Even if your card is only a $500 secured card, your balance should never exceed that 30%, i.e. $150. What you can try however is a bit of a credit rating hack, making multiple payments per month, rather than just one. Here’s an example: Let’s say you’ve charged $200 on your card and you plan to pay that off in full this month. Rather than making one $200 payment before the due date, make four $50 payments a week apart (just make sure that the last one is before the payment due date so your don’t get charged interest). In my experience, this seems to work in improving your score more quickly. So in the example where you’re using your card with the $500 limit, you could potentially spend $150, make a $150 payment, and spend another $150, and pay that. That gives your credit card lots of action, which might help your credit rating, but ensures that you don’t exceed the 30% of your limit. A win-win.
Tip # 6 – be open to alternative lenders
As you can see, getting a new mortgage after consumer proposal is not necessarily a slam dunk for several years, if you restrict your options to the mainstream lenders. If you do want to buy a home sooner, and can come up with the bigger down payment, a B lender is a good stepping stone. Taking a 1, 2 or 3 year term with a B lender, while working on fixing your credit at the same time, means that at maturity, you can look at refinancing back over to an A lender, and moving on with your life. Don’t worry that the B lender mortgage interest rates are ridiculously high; they’re not. And contrary to popular belief, you don’t need to wait six or seven years before getting a mortgage, either.
Tip # 7 – get advice from a mortgage broker
Yes, I know that sounds self-serving. But I have talked to so many clients who had bad experiences going in to their bank branch, that I feel very strongly about recommending that you talk to a good mortgage broker when planning to get a mortgage after consumer proposal. Not only does a mortgage broker have a much better overview of all the options available to you, you will also get someone who will help you with looking at your credit and making specific recommendations for improving it, give you feedback on any other aspects of your financial picture that you need to give attention to, and provide you with a game plan for getting a great mortgage, both short- and long-term.
Thoughts? Let me know your experience with getting a mortgage after a consumer proposal, what worked and what didn’t. And feel free to get in touch to discuss your own situation!
Photo credit: [c] Oleg Gapeenko for vecteezy.com