Your Mortgage After Bankruptcy

Alternative Lending Nathan Lawrence 24 Sep

By: Nathan Lawrence & Brianna Shortreed

Just because you have declared bankruptcy does not mean you have to dismiss your dream of becoming a homeowner. There are two options when it comes to applying for a mortgage after declaring bankruptcy. The first is to apply to a prime lender, this will take time, you will have to be discharged, and you will have to have a re-established credit history. The benefit is that you will receive a good rate and you can apply with a minimum 5% down payment. The other option is to seek an approval with an alternative lender, this will allow you to purchase a home quicker (sometimes even the day after being discharged from bankruptcy); however, you are going to have a higher rate and will need to have a sizable down payment.

Prime Lender

Step 1 – Wait a minimum of Two Years after Discharge:  After you have been discharged from your bankruptcy you will have to wait before you can apply with a prime lender. The minimum amount of time for most prime lenders is two years, but depending on the lender they might require more time. Some lenders are 3 years and some of the big banks can get up to even 5 or more. Each lender will have their own criteria for approval, your mortgage broker will know all of the specifics. The tricky part here is that your credit has likely suffered during your bankruptcy.

Step 2 – Re-establish Credit: While you are waiting the minimum of two years this is the perfect time to begin re-establishing your credit. You should start re-establishing your credit as soon as you can after your bankruptcy is discharged. You can re-establish your credit more quickly with two major credit cards with a limit of $2000-$3000. Other credit would be a car loan or line of credit. The important thing is to always make your payments on time and keep your balances below 60% of your limit. After bankruptcy it will be difficult to get approved for all kinds of credit, it is important not to give up and ask your mortgage broker about getting a secured credit card.

Step 3 – Save for a Down Payment: The lender will require a minimum 5% down payment from your own resources. This could be from a savings account, RRSP, or investment account. If you can save a 10% down payment you will receive more options. Set a goal and then start making monthly automatic payments into a savings account or a TFSA.

Alternative Lender

Step 1 –Understanding Alternative Lenders: Right after being discharged from your bankruptcy you can consider applying with an alternative lender. However, because you have not been discharged from your bankruptcy for a minimum of 2 years and your credit has not been re-established the lender is going to require a more sizable down payment and your mortgage will come with a higher rate.

The Down Payment: The minimum down payment will start at 20% when a lender looks at a more challenging application. A down payment of 20% does two things. First, it avoids the need of default insurance, and secondly, it provides a lender with some comfort knowing that the client has substantial “skin in the game.”

The Interest Rate: In the world of mortgage lending, a general lender guideline is that “the best predictor of future performance, is past performance.” Which is why credit history plays into a Bank’s lending decision. Alternative lenders price the interest rate based on the strength of an application, and more importantly the strength and marketability of the property.

Step 2 – The Paperwork your Broker Needs: Being prepared for your application meeting is important. Come prepared with the following paperwork

  • Bankruptcy discharge papers
  • Copy of your original Bankruptcy filing documents
  • Photo ID
  • Paystub & Letter of Employment
  • Summary of assets, savings, and investments with values

Step 3 – Exit Strategy: Alternative financing is not a long term plan and you need an exit strategy. Working with your mortgage broker, you need to outline the steps you will take to put yourself in a position to move to a prime lender as soon as you can. Putting thought into improving your finances can help an alternative Lender make their lending decisions.

So even after declaring bankruptcy you do have options when it comes to home ownership. You will have to make a decision on whether it would be best to wait and apply for a mortgage with a prime lender or if you want to speed up the process and apply for a mortgage with an alternative lender. Discussing your options with a mortgage broker will probably help answer some of your questions and make the decision easier for you.

Thoughts on the Buying Process, from a First Time Home Buyer

General Nathan Lawrence 24 Sep

By: Brianna Shortreed

We just recently went through our first home purchase and having a knowledgeable Mortgage Broker and Real Estate agent on our side was incredibly helpful! We definitely had some sticker shock here and there throughout the process but because we were prepared we were able to easily overcome each hurdle without any difficulty. This post will be about each step of the home buying process, it is a fun and incredible experience but we want to make sure you are not caught off guard by unexpected expenses and closing costs. The last thing you want is to feel like a deer caught in headlights and have your home purchase come to a crashing halt.

WORKING WITH PROFESSIONALS

One of the most important things you can do as a first time buyer is surround yourself with professionals that you can trust. They’ve gone through the steps many times and will know what to do in any situation that arises. They can also provide you with excellent advice; however, they won`t simply make the decisions for you (that’s still your job!). Start the process by visiting your local mortgage brokerage to get pre-approved for a mortgage. When visiting your lending institution you will learn about one lender’s mortgage products, this is why I highly advise visiting a mortgage broker as you will receive your best option from 100s of lending institutions that include banks, credit unions, and trust companies. Once you are pre-approved you will want to find a realtor that you enjoy working with, start by looking online or getting recommendations from friends and family. Working with a realtor to purchase a home also will have no cost to you, as the realtor’s commission is covered by the person that is selling their home.

BUDGET TOWARDS WHAT YOU CAN AFFORD

The amount you are pre-approved for is not necessarily the amount you will want to spend on a home, it is very important that you create a budget and stick to it. Start by completing our Home Budgeting Spreadsheet, this will look at your real-life situation including debt payments, insurance, saving goals and spending money. As homeowners, it is important to know what money is coming in and going out monthly. Next step is to save up for a down payment. You will require a minimum down payment of 5% of the purchase price. Also consider all of the other costs related to purchasing a home, which can include a home inspection, legal fees, title insurance, utility and property tax adjustments (if the seller had pre-paid any of these), and other administrative fees. If you take the guess work out of understanding your income and expenses, you will be much better prepared to purchase a home and manage your budget. Use the link at the end of this article to download the Home Budgeting Spreadsheet.

START LOOKING AT HOUSES

Once you have figured out what you can afford you can begin the fun process of looking for houses. It’s not always easy to find the perfect home but with the guidance of your realtor you will find something that suits your needs and wants. It was actually our realtor that suggested the house we ended up buying, she knew us so well! Once you find a home you will sit down with a realtor to fill out the offer paper work. This is one of the most beneficial reason of working with a realtor, when writing an Agreement of Purchase and Sale you have to have an understanding of the documentation. It is really important that you include a few conditions in the Agreement as well, these include a condition subject to financing, home inspection, and house insurance. Look at these conditions as a way to protect yourself if something unexpected comes up during the home inspection or the bank declines your mortgage request. The realtor will deliver the offer and make sure the proper signatures are obtained.

DON’T LET EMOTIONS DETERMINE YOUR DECISIONS

Sometimes your offer to purchase a home does not always work out, this is why it is so important not to get overly attached to a home before everything is said and done. Sometimes there may be a bidding war or the sellers will want to negotiate your offer price. You want to make sure you know the price you are willing to go to otherwise you may find yourself getting caught up in paying over your budget. The other thing that might make your home purchase fall apart is the home inspection, this happened to our first accepted offer. We put in an offer in our dream location and it was accepted, we knew the house needed a little bit of TLC but we weren’t prepared for what the home inspector told us. There was a rotting section of the roof that had to be redone, the electrical was not done properly and there were live wires, and the plumbing was done incorrectly. Most of the DIYs that had happened could be covering up other problems that we couldn’t or wouldn’t be able to see. Finally the water issues were enough to make you cringe. Needless to say we learnt a lot about what to look out for in a home and we weren’t quite willing to spend an additional $50,000 to bring the home up to code so we walked away, thank goodness our conditions allowed us to do that! It was disappointing but we were able to move on and we are happy that we did.

CLOSING COSTS

After you have found your perfect home and have fulfilled all of your conditions, the reality of “this is really happening” will begin to sink in. Up to this point you’ve only spent $300-$500 on the home inspection and given the realtor a small deposit on your down payment to hold in trust. You will first sit down with your mortgage broker and sign all of the mortgage documents, you will also get a break down of all your mortgage payments and see what will be going towards principle and what will be going towards interest. The nice thing about your mortgage is that the first payment won’t come out on closing, depending on your payment schedule it will either come out 2 weeks or 1 month later! When it comes to closing costs you can never really predict exactly what the total is going to be, so you might be in for some sticker shock but you should have a general idea of the approximate costs of everything. The lawyer will let you know the amount of money you must bring to the signing meeting (usually a couple of days before your closing date). The total will include the following:

  • Lawyer Fees ($1,000 to $2,500)
  • Title Search & Title Insurance ($250-400)
  • Administrative Fees & Certificates ($300)
  • Land Transfer Tax (Varies, Ontario has a $2000 Rebate for first time home buyers)
  • Anything Outstanding (if the seller had prepaid property taxes, gas, and other utilities)

The majority of these fees are also subject to HST, so make sure that you have factored that in as well. For Land Transfer Tax you might not owe anything but if your Land Transfer Tax is more than $2000 you will owe the difference.

I hope that after reading through this information you will feel more prepared and will not be caught off guard with your first home purchase. It should be an enjoyable and exciting experience and you’ve worked very hard in order to be able to afford it! The reason that you work with professionals is that you can ask them any questions that you might have. We wish you the best of luck with your first home purchase!

HOME BUDGET SPREADSHEET 

“B” Positive About Alternative Lending

Alternative Lending Nathan Lawrence 24 Sep

Mortgage markets are historically geared towards the prime borrower, these are people with a squeaky clean credit score, solid income, and are considered to be able to easily repay their mortgage. However, not everyone is going to fit into that category but that doesn’t mean you won’t be able to get approved for a mortgage. There are a growing number of Canadians who are turning to alternative lenders. As lending guidelines tighten they are being turned away from larger lending institutions. These lenders are often referred to as B-Lenders, high risk lenders, or alternative lenders, and these types of lenders can be helpful to those that have been hit by bad credit, have recently divorced, fallen on difficult circumstances, or are self-employed individuals. Just because the bank declines an application for a mortgage does not mean that you as a home owner are out of options. Remain positive and visit your local mortgage broker, they will be able to connect you with lenders that consider and approve all types of mortgage clients, including those who may have recently gone through a bankruptcy or consumer proposal.

When applying for a mortgage with an alternative lender, the mortgagor is not going to receive the lowest rates; however, they will be provided with solutions to help a home owner get back on their feet until they can qualify to re-apply for a mortgage with a prime lender. It is not what you would consider a be all, end all, solution but rather a stepping stone to working on building up credit and personal equity. Usually a mortgage term with an alternative lender is shorter, this way the borrower is not stuck with high interest rates for a long period of time. After all, an alternative lender should be a short-term solution.

Alternative lenders will look at applications on a case-by-case basis and they will want to hear the whole story. For example, if you had to apply for a bankruptcy in the past they will want to know why. If you are self-employed alternative lenders will want to better understand the nature of your business and income.

Work with a mortgage broker that has experience helping people with tough mortgages. They should also provide advice and connections that will help you build towards being able to apply for a prime lender at renewal. A good mortgage broker and alternative lender don’t want to see their clients end up in a downward spiral of higher and higher interest rates as they fail to manage their credit. The main goal of any alternative lender is to get the borrower on their feet and happy about being a homeowner.

Three Outcomes You Should Expect from a Well Prepared Alternative Lending Plan

Alternative Lending Nathan Lawrence 24 Sep

By: Nathan Lawrence

  1. Improve personal monthly cash flow – The new mortgage should help you feel more in control of your spending. Consolidate multiple payments into one mortgage payment that is lower than the total of the payments in their current state.
  2. Save you interest – Yes an alternative lender comes with a higher rate, but your broker should be able to explain why that is. By consolidating your high interest credit cards debt and loans into a new mortgage with an alternative lender, you will still likely save a lot of interest.
  3. Develop a recovery plan – You need an exit strategy so your mortgage will be back with an A-Lender as soon as possible. This means discussing credit recovery techniques such as getting secured credit cards and credit management.