How A Past Bankruptcy Affects Your Mortgage Approval

Just because you have a past bankruptcy, it doesn’t mean that you won’t qualify for a mortgage.   In order to qualify for the lowest market mortgage rates, and a minimal down payment of five per cent, your bankruptcy will have to have been discharged for a minimum period of two years.  CMHC (Canadian Mortgage and Housing Corporation), the leading provider of mortgage default insurance in Canada, also requires two re-established credit lines.  These can come in the form of a credit card, a car loan, a bank loan, or a line of credit from a bank.  These two credit lines need to have been established for a minimum period of one year, which doesn’t have to come after the two years of re-established credit. 

Not all credit lines are created equally, so it would be ideal to have at least one of them as a revolving credit account, such as a credit card or a line of credit.   These credit lines must have a minimum credit limit of $1,500 in order for them to qualify as sufficient enough for credit re-establishment for a mortgage in Toronto.   If you are able to set these limits over $2,000, then it will help your case even more so. 

So what happens if your bankruptcy has been discharged for less than two years?   It doesn’t mean that you can’t get approved for a mortgage, it just means that you will need to have a larger down payment and you will pay a higher rate.   How much more?  Typically a minimum down payment of 15-20% would be required in this particular case.   The mortgage term should be kept shorter as well for a couple of reasons.  The first would be to keep the rate as low as possible.   Shorter term mortgages carry lower interest rates.   Typically, these mortgages will be placed with an equity type lender, which is a lender that lends based on the ‘equity’ in the home, more so then on your credit.   You can expect to pay about 1% higher, give or take, on a one to two year term with an equity lender over the discounted five year fixed rate with an ‘A’ type lender, such as a bank.

The second reason for keeping the mortgage term as short as possible is that you will most likely want to refinance with an ‘A’ type lender at the time of your mortgage renewal in order to lock into a lower interest rate for a longer period of time, in order to keep your interest costs as low as possible.  It is best to discuss all these points with your mortgage broker to ensure that he or she understands your situation and puts a plan together to maximize your savings over time.

Bankruptcies sometimes happen to good people, and it certainly isn’t the end of the world.   It is good to know that there are options open to when seeking a mortgage after a bankruptcy.