Posted: 1 Mar '22

How Will Filing for Bankruptcy Impact Mortgage Refinancing?

How Will Filing for Bankruptcy Impact Mortgage Refinancing?

Refinancing your mortgage seems impossible for many Canadians who have declared bankruptcy or are planning to file for bankruptcy. However, this is far from the truth. Mortgage refinancing after bankruptcy is available for people that have been in this unfortunate situation.

Understanding how your bankruptcy affects your mortgage refinancing can help you prepare in advance. Indeed, a bankruptcy record is a significant blow to your credit score. However, you can rebuild your creditworthiness and qualify for mortgage refinancing. Call us today to build your personalized strategy.

Mortgage Refinancing After Filing for Bankruptcy

There are several steps you should take to improve your mortgage refinancing options after filing bankruptcy. First, get a credit card to rebuild your credit score. Then, pay every credit card bill on time to rebuild your credit report and create a new slate for mortgage refinancing. The purpose of consistency is to prove your commitment and ability to pay your debts on time. 

Second, shop around for a lender, especially after getting discharged from your bankruptcy. Typically, it takes at least two years for you to restore your creditworthiness for prime lenders. However, if you get a lender before the two years lapse, you can take out the equity in your home and use the cash to pay off debts or expenses. 

Third, make sure you have a consistent income that helps you make timely mortgage payments. Your income determines your ability to pass the OSFI Mortgage Stress test, which measures your ability to make mortgage payments. If you can secure a better job, get a raise or increase your income, do it. 

Unfortunately, there are several limitations to mortgage refinancing after bankruptcy. Prime lenders may refuse to refinance your mortgage because of the increased credit risk and low credit score. However, you can seek mortgage refinancing after bankruptcy from a Mortgage Investment Corporation (MIC) or a private lender. There are also equity banks in Canada that an experienced mortgage broker would have access to.

While private lenders and MIC are an excellent solution for people with bad credit, they also have higher interest rates. The equity banks will offer better interest rates than private lenders or a MIC. If you don’t like these options, then you can secure mortgage refinancing for the two years after bankruptcy lapses. Then, once the two-year period is over, you can refinance again with an equity bank. 

The Canadian Mortgage Stress Test 

Passing the Mortgage Stress Test is a major step for anyone seeking mortgage refinancing after bankruptcy. The OSFI mortgage stress test checks if you can qualify for a mortgage by analyzing your financial ability against certain stressors. 

In this case, the test checks if you can manage your monthly mortgage payments with a financial emergency or if interest rates increase. The test adds 2% to the interest rate the mortgage lender is willing to offer, or the rate set by the Bank of Canada, or whichever is higher. 

This test shows that you could afford a payment higher than the actual payment giving the bank some comfort of the long-term sustainability of your mortgage payments.

Should You Consider Private Lenders for Mortgage Refinancing after Bankruptcy?

Prime lenders are a top priority for anyone seeking mortgage refinancing. Their rates are low and affordable. However, prime lenders may deny your refinancing request, especially if you have a bankruptcy record and a low credit score. You may also find that rebuilding your credit score takes more than two years after being discharged from bankruptcy. 

Fortunately, you can consult a mortgage broker to help you improve your credit score and find the best rates among private lenders. These lenders are less strict than standard bank lenders and accept lower credit scores. Consult a bad credit broker at Dominion Lending Centres to get mortgage refinancing after bankruptcy.

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