A consumer proposal is a legal agreement between a debtor and their creditors that allows the debtor to settle their debts for less than what is owed. While a consumer proposal can provide much-needed debt relief, it can also have a significant impact on one’s credit score and ability to obtain credit in the future, including a mortgage. However, having a consumer proposal doesn’t necessarily mean you can’t get a mortgage in Canada. In this article, we’ll explore what a consumer proposal is, how it affects your credit, and what you can do to improve your chances of getting a mortgage.
What is a Consumer Proposal?
A consumer proposal is a formal process governed by the Bankruptcy and Insolvency Act that allows individuals who are unable to pay their debts to negotiate a settlement with their creditors. In a consumer proposal, the debtor offers to pay a portion of their outstanding debts over a specified period, usually between one and five years. If the creditors accept the proposal, the debtor makes payments to a Licensed Insolvency Trustee (LIT), who distributes the funds to the creditors.
How Does a Consumer Proposal Affect Your Credit?
A consumer proposal is considered a negative item on your credit report, and it will remain on your credit report for three years after the completion of the proposal. During the proposal, you are not allowed to obtain new credit without the LIT’s permission, which can limit your ability to make major purchases such as a car or a house. Additionally, your credit score will likely take a significant hit when you file a consumer proposal. Depending on your credit history, you could see a drop of up to 100 points, which can take several years to recover.
Can You Get a Mortgage After a Consumer Proposal?
Yes, it is possible to get a mortgage after a consumer proposal, but it can be more challenging than if you had a clean credit history. Most lenders will require that you wait at least two years after completing the consumer proposal before you can apply for a mortgage. During that time, it’s essential to work on rebuilding your credit and saving for a down payment. Here are some steps you can take to improve your chances of getting a mortgage after a consumer proposal:
Rebuild Your Credit
The first step to getting a mortgage after a consumer proposal is to rebuild your credit. One of the best ways to do this is to get a secured credit card. A secured credit card requires a cash deposit as collateral, which reduces the lender’s risk and can help you get approved. Use the card regularly but make sure to pay off the balance in full each month. This will help you establish a positive payment history and demonstrate to lenders that you are capable of managing credit responsibly.
Save for a Down Payment
Saving for a down payment is critical when applying for a mortgage, especially if you have a consumer proposal on your credit report. Most lenders require a down payment of at least 5% to 20% of the home’s purchase price. The more significant your down payment, the lower your mortgage payments will be, which can make it easier to get approved. Saving for a down payment can also demonstrate to lenders that you are committed to homeownership and have a stable financial situation.
Work with a Mortgage Broker
Working with a mortgage broker can be beneficial when you have a consumer proposal on your credit report. Mortgage brokers have access to a wide range of lenders and can help you find a lender that is willing to work with your unique situation. They can also help you understand your options and guide you through the mortgage application process.
Be Prepared to Explain Your Situation
When applying for a mortgage after a consumer proposal, it’s essential to be prepared to explain your situation to the lender. Be upfront and honest about your consumer proposal and the steps you’ve taken to rebuild your credit and improve your financial situation. Lenders will be more willing to work with you if they understand your situation and believe that you are taking responsibility for your financial obligations.
Consider a Co-Signer
If you’re having trouble getting approved for a mortgage on your own, you may want to consider finding a co-signer. A co-signer is someone who agrees to take responsibility for the mortgage payments if you are unable to make them. A co-signer can help you get approved for a mortgage and may also help you qualify for a better interest rate.
A consumer proposal can have a significant impact on your credit and your ability to obtain credit in the future, including a mortgage. However, with the right steps, it is possible to overcome a consumer proposal and get a mortgage in Canada. Rebuilding your credit, saving for a down payment, working with a mortgage broker, being prepared to explain your situation, and considering a co-signer are all steps you can take to improve your chances of getting approved for a mortgage after a consumer proposal. With patience and persistence, you can achieve your goal of homeownership, even if you’ve had a consumer proposal in the past.