Area of Law: Credit, Debt and Bankruptcy
Answer # 0263
How soon after bankruptcy can you get a loan, mortgage or other credit?Region: Ontario Answer # 0263
After you have been discharged from bankruptcy, the most important thing you can do if you want to get a loan, a mortgage or other credit is to start reporting and re-establishing your credit worthiness.
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Secured credit card
Getting a secured credit card is a good way to begin this process. When you apply for a secured credit card, you will be required to provide a security deposit, usually a minimum of $500 (depending on the company) in case you default on the account. This deposit is usually equal to, or larger than the credit card limit (the amount you are approved for). Once approved, you will receive your credit card in the mail and you can begin using it as you would a normal credit card. After several months of using the card you may be able to apply to get your security deposit back, otherwise, the deposit will be refunded in full with interest when you close the account.
You can apply for a secured credit card immediately after bankruptcy. If you are responsible with your payments and pay your balance in full each month, this will be reported to the credit bureau and will help establish a positive credit report that will begin to increase your overall credit score.
Loans and other credit
After you have been discharged from bankruptcy, there is no legal waiting-time requirement that must be met in order to apply for most loans, such as personal loans or car loans. However, lenders will ask for your financial information, including whether you are employed, current debts and assets, in addition to obtaining credit reports which contain information about your credit history and bankruptcy. Therefore, before immediately applying for a loan after being discharged from bankruptcy, it is a good idea to spend some time on repairing your credit, which will increase your chances of getting a loan.
As previously stated, there is no waiting-time requirement before applying for a mortgage after you have been discharged from bankruptcy. However, the more time that has passed since your bankruptcy, and the better your current credit rating, the more likely that you will be approved for a mortgage.
What type of mortgage you may qualify for, and when, depends on a number of factors. The most important are:
- How long ago was your bankruptcy discharged?
- Have you re-established your credit, and how good is it?
- How large is your down payment?
- TDS – Total Debt to Service ratio. The amount of debt being you are servicing as a percent compared to your total income,
- LTV – Loan To Value ratio. The amount you are borrowing compared to the value of the property.
Based on these factors, there are three options for getting a mortgage after bankruptcy:
Traditional or prime insured mortgage:
To qualify for a traditional mortgage, which may give you the best rate, you must meet the following requirements:
- have been discharged from bankruptcy for at least two years and one day
- have at least one year of re-established credit showing on two credit items (credit card, car lease, loan, etc.) usually with a minimum combined credit amount of between $2,500-$3,000
- have a minimum down payment of 5% for the first $500,000 of your purchase, 10% for any amount over $500,000
- if your down payment is less then 20% down you must have mortgage insurance – available through Canada Mortgage and Housing Corporation (CMHC)
- your minimum LTV is 95%
- your maximum TDS is 44%
A subprime mortgage is for borrowers who do not qualify for a traditional mortgage, but their qualifications exceed those for a private mortgage.
To qualify you must meet the following requirements:
- have been discharged from bankruptcy for at least 3 to 12 months
- your minimum LTV is 85%
- your maximum TDS is 50%
You may quality for a mortgage from a private lender as early as one day after your discharge from bankruptcy, and with little or no re-established credit, however, your rates will be higher than with a traditional mortgage.
To qualify you must meet the following requirements:
- have a minimum down payment of 15% of the purchase price
- your minimum LTV is 80%
- no maximum TDS
- you’ll need to obtain a full appraisal before the lender will sign off on the mortgage
- you usually have to pay a lender commitment fee – generally around 1% of the value of your mortgage
Sometimes, lenders will consider a person who has previously been bankrupt as a good candidate for a loan because:
- the lender can charge higher interest on the loan
- the person applying has a low debt load and therefore, may be in a better position to repay the loan
- people who have gone through bankruptcy are often much more financially responsible when repaying debt
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