You might be considering a consumer proposal to pay off your debt but are unsure of its impact on your house and mortgage. The good news is a consumer proposal lets you achieve debt relief from your unsecured debts, while protecting your assets. Below we explain just how a consumer proposal could affect your house and mortgage, as well as, the steps you can take to become a home owner after completing a consumer proposal.
Can I Keep My Home if I File a Consumer Proposal?
Yes. One of the key benefits of a consumer proposal is your assets are protected, which means you keep your assets while achieving debt relief. This includes any equity you have in your home.
When you file a consumer proposal, you are working with a Licensed Insolvency Trustee to create a plan to pay off your unsecured debts, such as credit cards, payday loans, and income tax debt. Any equity value in your home will be taken into consideration when calculating how much you should offer. This is because if you were to file bankruptcy any equity would be forfeited to your creditors. However, with a proposal you keep your home and repay the creditors an equivalent home equity amount over a period of time.
Keep Your Mortgage Payments Current
It’s also important to understand that a consumer proposal does not affect secured debt like your mortgage. You will be required to keep making your mortgage payments regularly and on-time. Failure to do so would result in your mortgage lender acting to seize your home due to mortgage arrears.
Moreover, under current laws, a lender is not allowed to cancel a mortgage just because you have filed for bankruptcy or a consumer proposal, if your payments are on time.
Will a Consumer Proposal Impact my Mortgage Renewal?
If your mortgage payments are current and on-time, you should be able to renew your mortgage with your existing lender while you are in a consumer proposal filing. The reason for this is your existing lender usually will not require a new credit application. However, filing a consumer proposal will impact your credit rating. In very rare circumstances, this may affect your ability to renew your mortgage at preferred rates. A lot will depend on your loan-to-value ratio, debt-to-income ratio and personal credit payment history.
Should you decide to switch lenders, or refinance your mortgage, you would need to file a new credit application. Your lowered credit rating would then be under consideration. In this case, it may be a challenge to renew with a new lender at your preferred mortgage terms. They may consider you a lending risk and have you refinance at a higher interest rate or possibly deny refinancing altogether.
Based on our experience, unless you decide to renew your mortgage with a new lender and therefore file a new credit application, a consumer proposal filing should still allow you to renew your mortgage with your existing bank in most cases.
Will a Consumer Proposal Filing Prevent me from Buying a Home?
A consumer proposal does not prevent you from buying a home in the future. While your proposal remains on your report for 3 years after discharge, there are steps you can take to rebuild your credit and prepare for a successful mortgage application.
As with any mortgage application, your chances of approval are increased if you have a significant down payment already (20% or higher) and a stable income.
In addition, here are some steps you can take to improve your ability to qualify for a mortgage after you have completed your proposal.
Qualifying for a mortgage after a consumer proposal
Because a consumer proposal allows you to lower you monthly debt payments, often quite significantly, now is the time to start building some savings. Consider creating a budgeting plan and direct your savings in debt payments towards a goal like saving for a down payment towards a new home and/or having a stable emergency fund. You should also make it a habit to pay all your bills in full and on-time to build a solid credit history during and after your consumer proposal filing.
Traditional lenders will look for the following in order to be approved for a prime quality mortgage after filing a consumer proposal:
- A two-year timeline after discharge, over which you have re-established a new, better, credit rating;
- Two or more new credit facilities (like a line of credit or a small bank visa); and
- Approximately $2500 in new credit.
While this process requires some patience and discipline, it’s in your best interest to build a large down payment and consistently pay all your bills. This way, you can rebuild your credit rating to qualify for a mortgage at an affordable rate. You can learn more about what you need to do to qualify for a mortgage after filing for insolvency.
What if my spouse has great credit, and only I’m filing a consumer proposal?
If you are planning to buy a home and your spouse has good credit, he or she could apply for the mortgage loan and have you join as a co-signer, if required.
If you’re already a homeowner, and just you or your spouse files a consumer proposal, or you file one jointly, your mortgage will not be affected as long as you are making its payments.
We understand you may have a lot of questions about how a consumer proposal filing affects home ownership. As each situation is unique, our debt relief professionals are more than happy to review your finances, answer your questions, and help you determine whether a consumer proposal is the right solution for you.