If you’ve ever contemplated bankruptcy, then you know the major concern for most people is how it will affect your mortgage. Bankruptcy is an unfortunate reality for many people, but it doesn’t mean you’ll never own a home again. Whether you’re considering filing for bankruptcy or you’ve already done so and want to learn more about your next steps toward homeownership, we’ve got you covered.
How Do Bankruptcies Affect Your Mortgage?
Despite what some people may assume, it’s possible to keep your mortgage and your house if you declare bankruptcy, but some advance planning is necessary to ensure you’re prepared for what comes next. We always advise talking to a professional to sort out your options to determine the best way to move forward as you’ll be faced with some decisions and roadblocks that could affect your current finances and what happens after your bankruptcy is discharged.
Does Bankruptcy Discharge Mortgage Debt?
Generally speaking, bankruptcy only discharges unsecured debts (credit/debit cards, unsecured lines of credit, payday loans, past-due bills, etc.). Secured debts, like your mortgage, are not discharged in bankruptcy. Secured debts are loans that are guaranteed by some type of property (like collateral). Bankruptcy doesn’t affect the rights of the secured creditor to use this collateral in place of missed payments. If you’re behind on your payments, your secured creditor is allowed to take possession (or foreclose on) the collateral asset and sell it to pay off your secured debt.
Does Bankruptcy Stop You From Buying A House?
The first question a lot of people ask when filing for bankruptcy is if it’ll affect their ability to buy another house. While it may delay the process a bit, it won’t stop you from it entirely. You can even use the required wait time to work on improving your chances of getting approved for a mortgage later. Work on monitoring and repairing your credit so lenders will see you as less of a risk when you’re ready to start house hunting again.
How Soon After bankruptcy Can I Buy A House?
Although bankruptcy filings can remain on your credit report for up to 10 years, that doesn’t mean you have to wait that long to get a mortgage. While you may qualify for a mortgage sooner, it’s usually a good idea to wait 2 years following the bankruptcy, as you’ll likely get access to better terms, including a better interest rate. Even the smallest difference on an interest rate can have a huge impact on both your monthly payment and the total cost of your home.
What Happens When I Need To Renew My Mortgage?
In most cases, you should be able to make a mortgage renewal after bankruptcy as long as the mortgage payments are up to date. Most banks would prefer to have you sign the mortgage renewal and continue paying it off over a longer period of time, than to foreclose on it at that point and risk losing all the future profits plus an additional amount of money by selling your house at a discounted foreclosure price. Always ask your lender for specific information as policies and procedures can vary.
How To Get A Mortgage After Bankruptcy
While filing for bankruptcy may delay the process of applying for a new mortgage in the future, there are plenty of ways you can increase your chances of approval the next time around.
Rebuild Your Credit
After filing for bankruptcy, lenders will see you as a higher risk so you’ll have to work on rebuilding your credit to reestablish your reputation. The first step toward improvement is checking your score. As scary as it may seem, knowing where you stand will help you better understand how you can improve. Make it a point to pull your recent credit report and make sure there are no errors.
Minimum Down Payment
You’ll need at least a 5% down payment and sufficient income to support a new mortgage payment. This minimum down payment is guaranteed by CMHC. To qualify for this mortgage you must have been discharged from bankruptcy for at least 2 years and 1 day and have at least 1 year of reestablished credit.
Wait A Minimum Of 2 Years After Discharge
Waiting 2 years will likely get you access to better rates and won’t require you to make as big of a down payment. So 2 years is the sweet spot for reapplying for a mortgage, providing that you’ve spent those 2 years working to rebuild your credit and reestablish your reputation as a risk-free borrower.
Show Re-Established Credit
It’ll be much easier to get a new mortgage if you can show that you’ve reestablished your credit. That means you should start rebuilding your credit as soon as possible if you intend to purchase another home after filing for bankruptcy. Look into getting a secured credit card to help you ease your way back into using credit responsibly.
Full Appraisal
An appraisal is an unbiased estimate of the value of a home that’s conducted by a third-party appraiser. In some cases, you’ll need to apply for a full appraisal for the new property before the lender will sign off on your mortgage. This ensures the lender is protecting their loan investment and allows them to justify the amount you’ve paid for the property.
Filing for bankruptcy doesn’t mean you’ll never own a home again. While you’ll need to do your part to improve your credit and reestablish your credibility to lenders, there’s nothing stopping you from coming out the other side in a stronger position to secure a new mortgage and move toward a more financially stable future. If you still have questions or aren’t sure exactly where to go from here, contact our team today.