Can You Get a Mortgage with a Consumer Proposal?

Getting a mortgage while in a consumer proposal can be a challenging process because a consumer proposal affects your credit score and borrowing capacity. However, it is not impossible to get a mortgage after a consumer proposal as long as you've taken the right steps in rebuilding your credit and have adequate down payment funds.

Understanding the conditions and requirements can help you navigate this situation. A consumer proposal is a legally binding arrangement made with creditors to repay a portion of your debt over time, generally at a reduced interest rate.

This solution is a common alternative for bankruptcy, but it will still impact your ability to get a mortgage. Some lenders will be hesitant to lend you money if you have recently completed or are currently in a consumer proposal, while others have more lenient policies.

The answer to whether you can get a mortgage during a consumer proposal largely depends on the specific lender and your unique financial circumstances.

What Is a Consumer Proposal?

A consumer proposal is a legal agreement between you and your creditors when you cannot afford to pay your debts. It’s an alternative to declaring bankruptcy and is designed to help you settle your debts in a manageable way while still repaying some of what you owe.

You work with a bankruptcy trustee to develop a proposal, which typically involves offering to pay a percentage of what you owe or extending the payment timeline. This process aims to help people overcome large amounts of debt without losing their possessions.

Impact on Credit Score

Although a consumer proposal can help manage debt more sustainably, it will have a negative impact on your credit score. Creditors typically view those who have submitted a consumer proposal as a credit risk, as it shows a history of over-extending credit and not paying debts in full.

Mortgage Eligibility with a Consumer Proposal

When it comes to mortgage eligibility, lenders evaluate applicants based on their creditworthiness and financial stability. For individuals with a consumer proposal, standard lenders are generally hesitant to finance a mortgage until at least 2 years of clean credit history following the completion (discharge) of the proposal has passed.

It's essential to make consistent and timely payments during and after your consumer proposal to show lenders your commitment to financial responsibility. This includes monthly proposal payments, secured credit cards, and any other outstanding loans.

Having a stable income and a significant down payment can also increase your likelihood of mortgage approval after a consumer proposal.

Can You Renew a Mortgage with a Consumer Proposal?

If you have a consumer proposal in place and are worried about renewing your mortgage, the short answer is yes, you can renew your mortgage while in a consumer proposal.

Renewing an existing mortgage is usually automated and should be straightforward with your current lender as long as your mortgage payments are up-to-date and on time.

It is important to note that there is a difference between renewing and refinancing a mortgage. Refinancing a mortgage is more challenging while in a consumer proposal, as it requires a new credit application and will be affected by your credit rating.

That being said, if you have significant equity in your home, refinancing your home to pay out a consumer proposal is a good idea so that you can discharge the proposal as quickly as possible.

Refinancing your home while in a consumer proposal is only possible at alternative lenders. These lenders will have higher rates and a 1% fee to set up the mortgage. Speaking to a mortgage broker about the pros and cons of alternative lending is essential before entering into an alternative mortgage to pay out your consumer proposal.

Renewing your mortgage, on the other hand, does not require a new credit application, so your existing lender will almost always approve the renewal.

Can You Get a New Mortgage with a Consumer Proposal?

Getting a new mortgage while having a consumer proposal can be challenging, but not impossible.

It largely depends on the lender and their requirements. Major banks and the default mortgage insurance companies, like Canada Mortgage and Housing Corporation (CMHC), require a minimum of 2 years to pass after completing the consumer proposal before approving a new mortgage.

During the 2 years after your consumer proposal, it is important that you rebuild your credit. The key to rebuilding credit its the "rule of twos." Insurers and lenders want to see 2 different types of credit, (trade lines) established after a consumer proposal with limits of at least $2000, with 2 years of clean repayment history.

That means if your consumer proposal was 5 years in length, it will take 7 years total for a triple A lender to approve a new mortgage: 5 years to complete the consumer proposal, plus 2 years rebuilding your credit.

Alternative lenders might approve mortgage refinancing even during a consumer proposal. In these cases, the lender will require the borrower to use the mortgage proceeds to pay out the consumer proposal.

This option is usually available provided there is sufficient equity in the property to cover the additional loan needed. For this to work, you would typically need more than 30% equity in the property. You can refinance the loan to 80% loan to value and use the 10% remaining equity to pay off the consumer proposal.

How to Get a Mortgage After a Consumer Proposal

Getting a mortgage after a consumer proposal is usually the more accessible option compared to getting a mortgage while in a current consumer proposal.

In addition to waiting two years after your consumer proposal, there are several steps you can take to improve your chances of getting approved for a mortgage.

Rebuilding Credit

One of the most important aspects of qualifying for a mortgage after a consumer proposal is rebuilding your credit score.

Lenders will be more likely to consider your application if you can demonstrate a consistent, positive credit history following the completion of your proposal. Some ways to improve your credit include:

• Using the "rule of twos." 2 types of credit, with limits of at least $2000 for 2 years.
• Paying all of your bills on time.
• Monitoring your credit report for errors and inaccuracies and actioning any errors by submitting a dispute to the credit agencies.

20% Down Payment

Saving for a substantial down payment will definitely help your chances of getting a mortgage. You’ll have a stronger application if you have at least a 20% down payment saved.

A 20% down payment shows the lender that you are financially responsible and capable of managing your finances since completing your consumer proposal.

It also removes the need for default mortgage insurance. If a default mortgage insurer isn't involved in the transaction, the lender will have more leniency to make exceptions and approve your loan.

Co-Applicant or Co-Signer

If you are still facing challenges securing a mortgage after completing the above steps, you may want to consider adding a co-applicant or co-signer to your application.

A co-applicant or co-signer can add strength to your mortgage application by providing additional income and a better credit history.

Keep in mind that a co-signer will be legally responsible for your mortgage payments if you fail to make them, so it's important to have a clear agreement in place with your co-signer beforehand.

Are You Eligible for a Mortgage After a Consumer Proposal?

Getting a mortgage after a consumer proposal is not impossible, especially with the right advice. Your eligibility largely depends on the specific lender's willingness to offer a mortgage with your financial history in mind.

Working with a mortgage broker ensures you’re getting the right advice and access to lenders who are friendlier to consumer proposals. For advice on getting a mortgage during or after a consumer proposal, contact the mortgage experts at Spire Mortgage.