Buying a home after bankruptcy - how to do it | Ingrid McGaughey | Toronto Mortgage Broker

Buy a home after bankruptcy – here’s how

Buying a home after bankruptcy - how to do it | Ingrid McGaughey | Toronto Mortgage Broker

Think you have to wait 7 years after bankruptcy before you can get a mortgage? That’s a myth. You can actually get a mortgage the day after you get discharged – though you might not want to. To find out how to buy a home after bankruptcy with your eyes wide open, read on!

1. Watch your credit

This is one of the most important aspects of your post-bankruptcy recovery. Pay on time, all the time. After filing for bankruptcy or a consumer proposal, lenders will be looking at your ability to manage credit. The best way to recover is to be the perfect borrower. Make at least your minimum payment on all your bills, and keep balances on credit cards and lines of credit to no more than 30% of the limit. Even one late payment after bankruptcy can hurt you, so you need to be super vigilant about this. For more details, check out my posts about credit after bankruptcy.

2. Boost your down payment

It’s possible to get a mortgage even with a bankruptcy showing on your credit report and a low credit score. But, the catch is that lenders will want you to offset that with a bigger down payment. In the first two years after your bankruptcy is discharged, you must have at least a 20% down payment – and the bigger, the better. After two years have passed, as long as you’ve been working to make your credit as strong as possible at the same time, you can start to look at buying a place with a down payment of as little as 10% of the purchase price. Less than 10% is possible, but it gets trickier, so I really recommend you shoot for at least 10% down.

3. Prove your income

Following a bankruptcy, you need to make lenders very comfortable with your income. They want to see that you can make your payments. Proving your income can be done in several ways. The most obvious is a job letter, pay stubs, and T4s. It gets trickier if you’re self-employed, receive commission or bonus income, or if there’s a cash component to your income. If your income can be clearly seen on your income tax return, and you have minimal deductions, simply providing two years’ worth of T1 Generals and Notices of Assessment from CRA may be enough to show your income pattern. If you have major deductions like a lot of self-employed people, or you only recently became self-employed, you may need to provide additional documents. These might include your business bank statements showing a pattern of deposits, copies of contracts, and similar proof of your income.

4. Be open to a B lender

An alternative lender, or “B” lender, is an option worth considering if you need to get a mortgage after bankruptcy. You can use it as a stepping stone to get to where you want to be, mortgage-wise. Normally, you would go with a B lender for a term of 1-3 years. After that, as long as you’ve continued to take steps to make your credit perfect, you can look at switching over to an “A” lender. People sometimes worry that B lenders charge crazy rates. That’s not the case! Although B lender rates are indeed higher than A lender rates, they typically start at around 1% higher than “A” rates. They can make the difference between buying a home now, versus having to wait another year or more.

The truth about mortgages after bankruptcy

You can get a mortgage as soon as one day after your bankruptcy. The trade-off is that the less time you wait, the more likely you’ll be expected to have a more sizeable down payment, strong income, and your mortgage rate will be higher. You may decide that you prefer to wait it out for 6 months or a year. Feel free to get in touch if you’d like to review your options.

How to buy a home after bankruptcy

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