The most common debt relief option in Canada is a consumer proposal, which can be an effective approach to handle money problems. However, it is reasonable to question how a consumer proposal affects your prospects whether you are a homeowner with an existing mortgage or are considering applying for a new mortgage.
In this post, we’ll examine the consumer proposal and, more specifically, how submitting one affects your present home, your ability to obtain a mortgage, and the overall effect it has on your credit profile.
What is a Consumer Proposal?
If you live in Canada, you can enter into a formal agreement called a consumer proposal to address your financial issues. In order to work toward paying off all of your debts over time, it would be necessary for creditors who are owed money from you to accept less than their original total if the court authorized it.
Making all of your debts into monthly payments can provide you more financial flexibility while still allowing you to pay off the bills you can afford. This method is helpful for people who have debts to numerous creditors. On the other hand debt consolidation can also help you pay all your other debts while taking one.
What will Happen to My Home If I File a Consumer Proposal?
If you are a homeowner, nothing changes. As long as you adhere to the requirements outlined in the Consumer Proposal, such as making consistent payments on time and continuing to make your mortgage payments, you may continue to own and reside in it.
You may need to provide additional proof that you can manage your Consumer Proposal in addition to your mortgage obligations to your mortgage company or the financial institution from which you borrowed money, but as long as you can assure them that they will receive their full monthly payment, you shouldn’t encounter any difficulties.
How Does a Consumer Proposal Affect My Credit Report?
Your credit report is a record of all of your financial dealings and contains a personal credit history. Credit bureaus will compile these transactions and use them to determine your credit score (sometimes called a credit rating), which informs conventional lenders of your borrowing dependability.
Any red flag on your credit report, such as missed payments or debt defaults, will be reported and is likely to lower your credit score. A low credit score can make it more difficult for you to get certain lending products because credit scores tell lenders how reliable you are.
Your credit score will suffer if you submit a consumer proposal since it informs your creditors that you are unable to pay back the full amount you borrowed. It’s important to keep in mind, that a missed payment will have a comparable negative impact on your credit record, and a consumer proposal gives you the chance to repair your credit.
Will a Consumer Proposal Impact My Ability to Get a New Mortgage?
When you apply for a mortgage, you’re essentially borrowing money from a mortgage lender to pay for the purchase of your home (without your down payment), and you’ll pay back your debt each month in the form of a mortgage payment.
It would be incorrect to claim that filing a consumer proposal has no effect on your ability to obtain a mortgage. If you have a track record of paying your debts off, lenders are more likely to accept your application than if you submit a consumer proposal, which suggests that you have previously experienced financial troubles.
With a consumer proposal, getting a mortgage is still doable, just a little more challenging than it would be otherwise.
Can You Get a Mortgage During a Consumer Proposal?
Even if your current mortgage isn’t yet paid off, a Consumer Proposal won’t stop you from getting a new one. You should still be able to provide the bank with the necessary paperwork, such as pay stubs and tax returns.
Other creditors might not even be aware that you’ve filed a consumer proposal until the process is complete, despite the fact that certain creditors may delay mortgage approval until debts are handled through a consumer proposal. You will offer yourself a decent chance of being accepted if you can make a sizeable down payment to decrease the obligation to the mortgage lenders (about 20% would be helpful) and have taken steps to ensure you aren’t a terrible credit risk.
Even so, it is still advised to hold off on applying for a new loan until your consumer proposal is finished and the court has accepted all payments.
Can You Get a Mortgage after a Consumer Proposal?
After a Consumer Proposal, if you’re interested in mortgage financing, mortgage brokers will search for proof that you’re a low-risk borrower. It’s likely that they will inquire about the following in order to assess that.
- Have you managed to improve your credit score since the end of your consumer proposal?
Any mortgage broker will demand proof that a person who has previously filed a consumer proposal has made an effort to enhance their credit standing. The two years following the termination of the arrangement are typically required as proof that your credit has improved.
- Have you managed to secure a credit card or another new line of credit?
In connection with the aforementioned, restoring credit frequently entails obtaining new credit, such as a line of credit or a credit card. Since the conclusion of your Consumer Proposal, if you have established a history of using and repaying credit, it will reassure your mortgage broker that you can be relied upon to make your payments on time.
- Have you saved a reasonable down payment for a new home?
The greater your down payment, the more likely it is that you will acquire a mortgage, just like in regular conditions. You reduce the risk for the lender by investing more of your own money in the property. Mortgage brokers would likely anticipate a down payment of about 20% of your entire mortgage for borrowers with Consumer Proposals.
Is There a Mortgage Broker for People with a Low Credit Score?
If anybody exiting a Consumer Proposal is concerned that they would be turned down by traditional lenders, it is logical that they could consider alternative lenders since they are available in Canada for people with bad credit.
Alternative lenders may provide you a better chance of being approved for a mortgage because they frequently claim that you will be accepted regardless of your credit history; nevertheless, being approved by these lenders comes at a cost.
In order to take advantage of the fact that you have few options because of your poor credit history, lenders who target these customers frequently tack on high interest rates to your repayments as well as substantial late penalties if you ever miss a payment.