After filing a consumer proposal, the last thing on your mind might be a new mortgage, but you may be a lot closer than you think.
Maybe you want to buy a house or are you a home owner and want to refinance your mortgage? Let’s talk about buying a house first.
When can you buy a house after a consumer proposal?
In fact, this question comes up often. People want to know how long can they buy. Sometimes they ask right after they file their consumer proposal, and other times it’s more than five years later, after they’ve fully paid it off.
First, pay off your consumer proposal completely before taking on any significant new mortgage debt.
If you have at least 20% down payment, you may even be able to buy as soon as you complete your consumer proposal! As in, immediately.
You will almost always work with a B lender or a private lender, but it is doable. But it’s not just a matter of having completed your consumer proposal. Make sure you’ve rebuilt your personal credit history—with new credit facilities and cleaning up reporting errors. (There are ALWAYS reporting errors after filing a consumer proposal.)
If you have less than 20% down, you’ll want to look for a high-ratio mortgage, which has default insurance, from CMHC, Genworth, or Canada Guaranty.
In this case, you will need at least two years of clean new credit since you completed your consumer proposal. But it’s better if you have at least two tradelines (credit card, loan, line of credit, etc.) with limits above $2,000.
In the worst case, three years after you complete your proposal, or six years after you file your proposal (whichever comes first), it will disappear from your credit report and whether or not you qualify for a mortgage to buy a home will depend on the usual mortgage qualification criteria that we all face.
When can you refinance your home after a consumer proposal?
This too can happen very quickly—in fact, we’ve helped many homeowners refinance their homes so they can complete their consumer proposal sooner. In some cases, it was as soon as the terms of their proposal were ratified by the court.
It’s called a lump sum consumer proposal, and it can be a great way to settle your debts if you’re a homeowner.
Should you repay your consumer proposal when refinancing?
In fact, there are a few private lenders that will allow you to not pay your proposal while you mine the equity in your home. But unless there are specific, logical reasons to do so, it’s not something I recommend.
I prefer refinancing to fully pay off the outstanding balance on the consumer proposal. There may also be other things you need money for at the same time—such as a home improvement project or a child’s college education, or other family debts.
CRA debt also comes up a lot, especially for the self-employed. You can take care of all of this at once, provided you repay the consumer proposal.
Why repay your consumer proposal earlier?
1) Fear of mortgage renewal. This concern is very real if your mortgage lender had a credit card or loan product included in your consumer proposal. They might not have an interest in offering you a renewal when your current mortgage comes due. You should therefore tackle this problem as soon as possible, if your situation allows it.
2) A strong desire to rebuild your personal credit history. Once you drop your CP, your credit score is going to take a major hit. All debts included in the proposal will be reported as R7 on your personal credit report.
Worse than that, some of them will wrongly report R9s—completely written off.
And some credit cards may say they’ve been included in a bankruptcy, even though that’s not true.
A few credit cards are even reporting late payments in progress after the proposal has been submitted. And sometimes even once the proposal is finished!
If you want to repair the damage to your personal credit report resulting from your consumer proposal, you are going to have to wait until it is paid in full and you have a certificate of completion from your trustee. here is Further information on rebuilding credit after a consumer proposal.
3) Wish to be normal. When you have bad credit, everything in life seems harder and more expensive. Even if you want to rent a house and not buy one, the landlord will usually ask you for a copy of your credit report.
And if you want a new smartphone, or lease or finance a new car, bad credit will make it that much harder.
If you allow your consumer proposal to last for five years, that means it could be on your credit history for a total of six years. It drops three years after finishing, so keep that in mind. You can significantly reduce the waiting time by paying the consumer proposal earlier.
4) Improve cash flow. In almost every case, when we refinance a home whose owner pays off a consumer proposal, they see an improvement in their monthly cash outflow. In a society where half of us live paycheck to paycheck, that’s attractive.
How to refinance to repay a consumer proposal?
First, your mortgage broker will do a thorough assessment to find out if this is feasible or not. They’ll assess the marketability of your property, the amount of untapped equity, why you’re filing your consumer proposal, and all the normal things lenders look for when reviewing a mortgage application.
An important consideration is your current first mortgage. Has it been renewed or is it approaching maturity? Which lender is it with and what might the prepayment penalty be if you were to break it and refinance a new first mortgage with lender B?
Another consideration is whether or not your first mortgage is registered as a collateral charge, and if so, at what amount is it registered? We wrote about it few months ago—this can make things difficult.
If refinancing the current mortgage makes sense, your broker will submit your application and a presentation to the B lenders most likely to accommodate a case like yours. And they will bring you quotes for your consideration. If you choose to continue, most of the time the whole process can be concluded in four to six weeks.
In fact, this happens less often than the other approach, which is to apply for a second private mortgage first.
In this scenario, the first mortgage is left intact and a new lender is found who will lend enough money to cover the balance of the proposal, all other debts and needs, and all expenses associated with the mortgage.
During the term of the second mortgage (usually one year), we take the opportunity to clean up any misreporting from the credit report, and also to strengthen the borrower’s credit profile with new healthy credit.
After one year (longer if that makes sense) we will then refinance both mortgages into one first mortgage.
It would be normal to expect this new replacement mortgage to be with lender B, since the consumer proposal is still fairly new. Right here are some ideas on how to do it.
Ultimately, the goal is to bring homeowners back into the A-lender world. This is usually possible after three years, but we’ve seen cases where it happened much earlier.
But that would never happen if customers didn’t first make the decision to refund the consumer proposal sooner than expected.