We’re told that a consumer proposal or bankruptcy gives us a second chance to get things right. A fresh start. But what does that mean when it comes to buying a home after a consumer proposal?
This article will discuss three different scenarios.
- If you recently completed a consumer proposal
- If you have not yet completed paying off a consumer proposal
- You have not yet filed a consumer proposal
THIS FELLOW RECENTLY PAID OFF HIS CONSUMER PROPOSAL
We received an email from Jared in this exact situation. He wrote:
“Can you please advise me on my situation. I filed a consumer proposal late last year, and I paid it off quickly within three months, and now I want to buy a condo for $300,000. Condo fees and property taxes are $250 and $150 per month. I have $30,000 for the down payment.
My TransUnion credit score is 524. I have no other debts, and I have not yet acquired a new credit card. My monthly income is $4,000 gross. I have a sister who has agreed to be a guarantor or co-signer if required for the mortgage.
She has an excellent credit score and a mortgage-free house and no debts. Would I be able to qualify for a mortgage and would it be at a low rate like 3 percent or so, or would it be at a higher rate? Thanks for your help.”
It is really great Jared paid his proposal off so quickly; this is the first step towards rebuilding his personal finances. Some people can qualify for a mortgage immediately with alternative lenders (such as Equitable Bank, XMC Mortgages or HomeTrust Company). He will likely need a down-payment of at least 25% to merit consideration.
Jared states he is looking for best interest rates – those of an ”A lender”.
That is not going to happen if he plans to include himself on the mortgage application.
Jared is correct he cannot do this on his own.
Consumer Proposal & Lenders
Here are the credit factors “A lenders” look at:
- Has Jared proven he can manage new credit facilities since he entered his consumer proposal? No, he has not. In fact, he has no new credit since filing. A rough rule of thumb for “A lenders” is they want to see at least two new facilities, serviced without blemish for at least two years; and with borrowing limits of at least $2,000.
- What is his credit score? Whether they look at TransUnion, where Jared’s score is only 524, or Equifax, clearly his score is way below acceptable. 650 is a threshold many lenders use, and the higher the better.
- What were the reasons he had to file a consumer proposal and was real estate involved?
- Was he a good citizen who just hit a bump in the road, or was he an ingrate who wantonly abused his credit privileges?
Jared is very fortunate his sister is willing to step up and help any way she can. This can work, but not quite the way he wants it to. Jared’s name on this application is going to weaken it to the point where they would not be approved by an “A lender”.
I suggested he ask his sister to buy the home in her own name only.
She is debt free and owns her own home with no mortgage. Assuming she has enough income to service Jared’s new condo mortgage, as well as the property tax and heating costs of her own home, she should be good to go – with absolute lowest rates and best terms.
How does this help Jared? Well, he can move into the home immediately and agree to pay ALL monthly costs associated with his sister’s new mortgage. Take two to three years to re-establish his credit history.
When the time comes that he is strong enough for consideration, they could apply to his sister’s mortgage lender for him to assume (take over) the mortgage and title to the condo.
This can definitely work. I suggested they consult a real estate lawyer about structuring things upfront to reduce the chance of paying land transfer taxes twice and to review other personal income tax considerations for his sister.
The take away about buying a home after a consumer proposal
Once you complete your consumer proposal, you are a free agent and you have as much right to buy a home as the next person. You will be working with alternative and private lenders for the first two years or so following the completion of your consumer proposal.
- Your required down payment will be at least 20% of the purchase price. This is because no mortgage insurer will insure a hi-ratio purchase in your name until at least two years have elapsed
- You should maximize your credit score to its highest potential, and clear up any reporting errors in your personal credit report. (In our experience you can expect several such errors once you complete your consumer proposal) We can help with that – we have a well-structured process for fixing your damaged credit score.
- You will have to demonstrate decent income and employment, just like with any other mortgage. If you are self-employed, make sure all your personal, corporate (if your business is incorporated), and HST tax filings are current and paid up.
If you can satisfy these three basic criteria, you could be well on your way to buying a home after completing your consumer proposal!
IF YOU HAVE NOT YET COMPLETED A CONSUMER PROPOSAL
This comes up quite a lot actually. People find a couple of years after they file their consumer proposal that life improves dramatically! They find it easy to make just one payment to the trustee each month AND they are able to save up extra money. They start to dream about home ownership.
Their instincts are good. They are far better prepared to handle home ownership now than when they were mired in a sea of debt. But to take the next step towards homeownership, they must first pay off the consumer proposal.
No mortgage lender will give you a mortgage to buy a new home while you are still in the consumer proposal.
So take some of your savings, contact your trustee to tell them you want to pay your consumer proposal off, and they will issue you a consumer proposal completion certificate.
After it’s paid off, review your personal credit history at www.equifax.ca and make sure you clean up all the reporting errors left behind by your consumer proposal. (We have services for that – it’s absolutely essential this is done correctly)
Continue to save up money towards your down payment; rebuild your credit score, and prep for making an offer to purchase. As long as you can bring at least 20% down payment to the party, you have an excellent chance of qualifying for a mortgage after you complete your consumer proposal.
SHE HAS NOT YET FILED A CONSUMER PROPOSAL (CASE STUDY)
If you’re planning on buying a home after your consumer proposal, but have not yet filed, here’s a question from another reader that will shed some light on what may await you in the future.
The question comes from a reader who is tangled up in payday loans but is about to enter a consumer proposal and eliminate the stress as well as the killer monthly payments and interest rates. She wants to buy a house right after the consumer proposal is paid off, or at least a few months thereafter.
“I’m doing very well in my career now, but the mounds of loans, payday loans and balances on my two credit cards are catching up to me. My debt is around 30k and I’m in the process of doing up a consumer proposal just so my debt is not eating up all of my pay cheques and forcing me to do another forever revolving theme of applying for another payday loan.
I have a lot of big commissions coming up in the next few months and got a second job where I am hoping to pay off the entire consumer proposal very quickly. I am paying off and keeping one credit card before the proposal is in place to help build my credit. I also have my car loan and possibly getting a new secured credit card to help build my credit.
Anyways, my main question is with a current beacon rating of 608 with no late payments on file or anything, would I be able to apply for a mortgage right after I pay off the consumer proposal and possibly get a decent rate in time?”
I wrote back, “The odds are stacked against you for a mortgage that soon, but not necessarily impossible.
Here are a few thoughts:
- Mortgage lenders, in particular, are all about new credit and how you handle that – in my experience, they do not give enough props to an older credit card in good standing (some give no credence to it). The car loan is what it is. No question together they will help your score – but it’s more than just the score they look at – it’s the story leading up to your consumer proposal, and what have you done since?
- Sounds like you have not actually signed up for the consumer proposal yet – if that is correct, your score is going to take a beating in the months following that day. 608 will prove to be a high-water mark for you. Don’t be surprised if your score drops a hundred points or more. That said, you should be able to get back up to the low to mid 600’s within a year to year and a half.
- The earlier you want to apply for a mortgage (in your circumstances) the larger a down payment you will need to satisfy an alternative institutional lender. (I don’t know what you are thinking in this regard, but you will not be a member of the 5% or 10% down payment fraternity. Think 20% at an absolute minimum.
- Given you now have no late payments on your file, I am curious why your current score is as low as 608. I’d be happy to review if you would like to send me a copy. The most obvious reasons are (a) you are actually over the limit on one or two credit facilities (b) you perhaps have several recent inquiries (c) something is in a collection process.
- When the time comes that you are in fact ready for a mortgage (assuming we are still talking sooner rather than later) a ‘decent rate’ for you would be around 4.99% and you could expect to be charged a one-time lender fee up to 1% of the mortgage amount.
In the above situation, the main variables are:
- How large will the down payment be
- Average annual income
- Credit rebuild program after the proposal
- Higher interest rate than your AAA friends
- The property being purchased
As you can see from the above scenarios, buying a home after your consumer proposal is a real possibility. However, to solve problems like this requires a deep understanding not only of the mortgage industry but also about credit histories and rebuilding credit. You need to look for solutions which do not involve your bank since they will not be able to help.
Solving complex mortgage challenges and helping you rebuild credit are just a few of our specialties here at Ross Taylor & Associates, feel free to get in touch if you need help with rebuilding your credit or structuring a mortgage around your consumer proposal.