Applying for a Mortgage after Bankruptcy
Applying for a Mortgage After Bankruptcy in Alberta: What Lenders Look For
Filing for bankruptcy can feel like a significant setback, but it doesn't mean you won't be able to own a home in the future. While applying for a mortgage after bankruptcy in Alberta is more challenging, it’s not impossible. The key is understanding what lenders are looking for and taking steps to rebuild your financial profile. Here’s a guide to help you understand how to apply for a mortgage after bankruptcy and improve your chances of getting approved.
1. Time Since Discharge
One of the first things lenders consider is how much time has passed since your bankruptcy was discharged. Most traditional lenders in Alberta require a waiting period after bankruptcy before considering a mortgage application. Typically, this ranges from 2 to 3 years after discharge. However, some alternative lenders may consider approving a mortgage sooner, but at higher interest rates.
The longer you wait after discharge, the better your chances of securing a mortgage with favorable terms. During this time, focus on rebuilding your credit and demonstrating financial responsibility.
2. Rebuilding Your Credit Score
After bankruptcy, one of the most critical factors lenders will assess is your credit score. A strong credit score shows lenders that you’ve turned things around and are less of a risk. Start by:
Paying all bills on time: Payment history is a significant factor in your credit score. Set up automatic payments to ensure nothing is missed.
Using a secured credit card: A secured credit card requires a deposit and helps you rebuild credit when you make regular payments. Keep balances low and pay them off in full every month.
Monitoring your credit report: Regularly check your credit report for any errors or discrepancies that could be dragging down your score.
A credit score of 680 or higher is generally needed to qualify for a mortgage in Canada, though higher scores will lead to better rates.
Lenders will also look for evidence that you have re-established credit since your bankruptcy. To do this, lenders generally require that you have at least two active trade lines for at least 2 years.
Trade lines are credit accounts that report to credit bureaus, such as credit cards, car loans, or other lines of credit. Maintaining two trade lines in good standing—meaning you’re making regular, timely payments—demonstrates that you’ve regained control of your finances. Lenders will review these trade lines to assess your creditworthiness and see if you're capable of managing new debt responsibly.
Tip: Consider getting a secured credit card or small loan to help build up your credit after bankruptcy. Pay off your balances in full each month to show that you can manage debt responsibly.
3. Stable Employment and Income
Lenders want to ensure you have a stable income that can support mortgage payments. Consistent employment in the same field for at least 1 to 2 years is often preferred. If you’re self-employed or have fluctuating income, be prepared to provide more documentation, such as tax returns and bank statements, to demonstrate your financial stability.
A solid employment history shows that you can maintain a steady income, reducing the risk in the eyes of lenders.
4. A Sufficient Down Payment
After bankruptcy, having a larger down payment can significantly improve your chances of mortgage approval. In Canada, a down payment of at least 5% is required for homes under $500,000, but if you’ve had a bankruptcy, lenders may require more to mitigate their risk. A down payment of at least 10% or higher may be needed to secure a mortgage with better terms and it is recommended it come from you own resources vs a gifted down payment.
Saving for a larger down payment not only increases your chances of approval but also reduces your monthly payments and the amount of interest you’ll pay over time.
5. Working with a Mortgage Broker
When applying for a mortgage after bankruptcy, working with a mortgage broker can be highly beneficial. Brokers have access to a wide range of lenders, including alternative or subprime lenders who may be more flexible in dealing with borrowers recovering from bankruptcy. A broker can guide you through the process, compare rates, and find lenders who are more likely to approve your application.
In Alberta, mortgage brokers can help connect you with lenders who understand your situation and can offer solutions tailored to your financial recovery.
6. Alternative Lenders and B-Lenders
If you don’t qualify for a mortgage with traditional lenders, alternative lenders might be an option. These lenders specialize in working with borrowers who have experienced bankruptcy or credit issues. While the interest rates may be higher, they offer a path to homeownership when mainstream lenders decline your application.
As you improve your credit score and payment history, you can consider refinancing your mortgage with a traditional lender in the future to secure better rates.
Conclusion: Be Patient and Stay Disciplined
Applying for a mortgage after bankruptcy in Alberta requires patience and financial discipline. By rebuilding your credit, maintaining stable employment, saving for a larger down payment, and working with a knowledgeable mortgage broker, you can increase your chances of approval and eventually secure a mortgage that fits your financial goals.
If you’re ready to explore your options and take the next steps toward homeownership after bankruptcy, contact me today for personalized guidance and support through the mortgage process.
