How Bankruptcy Can Affect a New Mortgage

Our COO, Chad Riddell, discusses the affect that bankruptcy has on getting a mortgage — and outlines a best practice to get there.

You have a bankruptcy in your credit history. So now what?

Chad Riddell, COO – September 26, 2016

While going bankrupt is likely not on anyone’s wish list of life experiences, when it does happen, it's important to try to minimize its knock-on effects.

A bankruptcy can have a big impact on the ability to get a mortgage.

“It’s not the end of the world for most people, but they have to know what to do when they’re getting out of the bankruptcy,” says Chad Riddell, Chief Operating Officer and mortgage broker with True North Mortgage in Calgary.

He breaks it down into a “rule of two, two and two,” whereby a person must be discharged from bankruptcy for two years, and must re-establish two credit lines from the day of discharge.

“If you have all that, and you don’t miss any payments, you should be in a good position to get approved for another mortgage.”

These credit lines can be any two of:

  • A credit card, loan or line of credit
  • A line of credit can be hard to establish for those dealing with a bankruptcy, as the lower interest rates are generally given to clients in good financial standing

Securing a loan for a Registered Retirement Savings Plan (RRSP) can also be a prudent option — in effect, killing two birds with one stone. "It helps to re-establish some credit, but it also helps build some savings for you,” says Lee Welbanks, principal broker at Welbanks Mortgage Group in Toronto.

Like Mr. Riddell, Mr. Welbanks also endorses the two-two-and-two rule, but emphasizes that it’s also important to build up some savings as well.

“A lender doesn’t want to look at somebody who’s coming back to the table without sort of learning their lesson,” he says. “They need to re-establish credit and be responsible with it, and they also need to get some savings in place.”

Not every lender will lend to bankruptees, but there may be some options.

Some lenders will take a hard-line stance with anyone who has gone bankrupt, but that doesn’t necessarily mean the end of the road. “If the profile is strong, they’ll still look at it,” Mr. Welbanks adds.

Having a good down payment is also something a lender may consider. Mr. Welbanks lists 10% as the magic number in this situation, saying that the risk of default when a borrower goes from 5 to 10% with their down payment is approximately halved.

A word of caution, however, in trying to re-establish credit.

Those trying to re-establish their credit are walking a fine line. Any glitches could prove costly, so it's vital to stay on top of minimum payments to the new credit cards and other loans.

“All it takes is one 30-day late payment to show up on your credit history, and you’ve basically blackballed yourself from there,” says Mr. Welbanks.

As another word of advice, Richard Moxley, a former mortgage broker and the host of CreditTV.ca, says that "while re-establishing credit, preferably with two credit cards, it's important to stay under 50 per cent of a card’s limit to show financial discipline."

However, that doesn’t mean that the card shouldn’t be used. Quite the opposite, in fact, as the cards need to be used at least once a month.

“A lot of people think they have to keep a balance to have good credit,” he says. “That’s not true, they just have to use it, whether it’s $5 or $1,000, it doesn’t matter.”

Mr. Moxley also advises any clients who have been discharged from their bankruptcy to get copies of their credit reports from both Equifax Canada and TransUnion Canada and go over them both carefully.

When people go through debt programs, he says, creditors sometimes don’t remove the balance following discharge, leaving mistakes on the credit report.

“What stops a lot of people from qualifying for a mortgage is not the fact that they’ve been through a bankruptcy or a debt program, but because their credit report still shows them owing all this money that they legally don’t owe any more,” he says.

Ultimately, while it may take a fair bit of work to position themselves to get a mortgage following bankruptcy, it’s important they know that it’s not a lost cause. Taking immediate action following discharge from the bankruptcy is essential.

Don't wait to take the steps to improve your credit standing.

“Don’t wait until two years down the road when you go to make an application to try and fix it then,” Mr. Welbanks says. “You really need to grab the bull by the horns right after you get discharged from your bankruptcy and take the right steps.”

Lastly, COO Chad Riddell, says that "at True North Mortgage, our expert brokers can help guide you and outline the details if you're recovering from a bankruptcy, and are looking to buy a house or property."

Have questions about your credit? We can help, a lot. Connect with us today for great mortgage advice.