by Donna Ryan, Mortgage Representative
Centum Financial
Understanding mortgage financing is tricky at the best of times and certainly becomes more difficult after you have declared bankruptcy. The best way to navigate through the minefield is to understand how mortgage lenders think and what they look for. All institutions that lend money are primarily worried about one thing… risk… and will they be paid back the money. In their eyes a person who has been previously bankrupt poses a higher risk than a person who has not. This does not mean that you cannot obtain a mortgage after bankruptcy, but there are some things that need to be done and some pitfalls you should not fall into.
There were some lenders who would consider mortgage financing 1 day after discharge, but due to the current mortgage situation in the U.S., most lenders have become nervous and will only consider financing after you have been discharged for 6 months.
Equifax and Transunion credit bureau reports are of great importance to a lender and that is one of the first things they look at. What is your credit score and what does your past credit history look like? A bankruptcy will stay on your credit bureau for 7 years. A second bankruptcy will trigger the 1st one to show on your Transunion credit bureau even though the first bankruptcy was over 7 years old. Lenders will not consider mortgage financing if a double bankruptcy situation shows on the credit bureau report. In the case of a double bankruptcy, the most recent one would have to be over 7 years old for a lender to agree to financing.
After discharge from bankruptcy you should check your credit bureau report to ensure that all items included in the bankruptcy show this way on your report. Some institutions do not report correctly and this can give you an artificially low score and could potentially prevent you from obtaining credit of any kind or paying a higher interest rate than you need to. A copy of your credit bureau report can be acquired for free from Equifax. If there are some errors, you can show your bankruptcy papers to Equifax and they will make the corrections for you. Once this is done it usually takes about 3 months for your score to improve.
Some credit needs to be established after bankruptcy. This can be accomplished by obtaining a secured visa, an auto lease, an auto loan.. etc. Most lenders like to see two credit items that have been reporting for 6 – 12 months.
It is vital that you never make a late payment after the bankruptcy.
If it is at all possible, it can be beneficial to carry some credit through the bankruptcy. As long as the payments are made on time, all the time, this can help to improve your credit score and is a positive in the eyes of the lenders.
We see a situation quite often with couples where only one has some credit showing on their bureau report, for example, a car lease. An easy way to establish credit for the other is to make the lease joint. This will start reporting on both credit bureau reports without having to increase the amount of credit.
In order to be considered for mortgage financing 6 months after discharge some credit will have to be re-established or existing, and reporting (with no late payments) for 6 – 12 months. Also a minimum down payment of 10 – 25% will be required. Once you have been discharged for a year with re-established credit, the down payment may only be 5 – 10%. Two years past the discharge and it is possible to obtain 100% financing or no down payment as long as re-established credit exists, again with no late payments.
If you have had a mortgage foreclosure included in your bankruptcy and this shows on your credit bureau report, you will have to wait 7 years for this to disappear from the report. The other trouble area is student loans. You cannot include a student loan in a bankruptcy. If a student loan goes to collection, a lender will want the collection paid in full prior to agreeing to financing. This would obviously be a very difficult thing for most people to do. It is therefore important to maintain student loan payments.
There is the possibility of getting a mortgage after you have been discharged from bankruptcy, but the best way to get to that goal is to think like a mortgage lender and understand what to do and probably more important… what not to do.
Tony Ruprecht, an Ontario MPP is trying to rally support for a private member’s bill that would bring Ontario legislation on credit reporting agencies up to international standards. “If this bill passes, it becomes the model for the rest of the country,” Ruprecht predicts.
We have always told people that if they were diligent they could 
