Buying a Home after Bankruptcy
Introduction
Hi, this is Victor Fong, trustee in bankruptcy. Today, we’re here to talk about a subject that’s frequently asked of me whenever I meet with people. They ask “Victor, if I file bankruptcy or I do a consumer proposal, will I ever be able to own a home again?”
Well, because this question is raised so many times to me and is so important to you, we’re here to talk with Mr. Raymond Kar of Hero Mortgage. Raymond is an MBA graduate of the York University School of Business, as well as a licensed mortgage broker.
So prepare yourself for some enlightening information…..
Victor: Ray, thanks for being with us today.
Ray: You’re welcome.
Victor: Ray, I’m often asked by people I meet and interview “How can someone like me, who’s filing a bankruptcy or a consumer proposal start my life over? How would I be able to apply for a mortgage?”
So if you hear this question, what would your response be? Maybe you can start with the first step.
Ray: Well Victor that’s a very common question – I’m glad you asked it. The first thing you’d want to do following your bankruptcy is to re-establish some type of credit.
Now generally the most effective step, given that you now have no credit score and your bankruptcy will be noted on your credit file for 7 years, is to approach a major lender and asked them for a secured credit card. Now you’d want to have a reasonable balance – possibly $1,000 and up. So what you would do is that you’d go to the bank with $1,000 or more and you’ll ask them to give you a VISA or a Mastercard.
From there, after a period of several months, you’d be paying that card off and paying your bills on time. You will have established an initial credit score and from there, you can go to other lenders and ask them for additional credit.
Now generally, post-bankruptcy you want to establish several sources of credit so that an underwriter looking at your credit file will see that you’ve got more than one source of credit, which provides a more valid indicator of your ability to manage credit.
The second thing you’d want to do following bankruptcy as a step towards buying a house is to start saving for a down payment. Now generally, the minimum down payment that you should target is 5 percent, but ideally you should strive to save about 15 percent down. With 15 percent down and re-established credit, you’ll find that you’ll have the maximum flexibility and choice in terms of getting yourself mortgage-worthy.
Victor: Well Ray that’s a very interesting answer. I guess what I’m wondering is what type of lending institutions would lend money to someone who’s just been discharged from bankruptcy? What type of institutions for example, as a mortgage broker, do you deal with, and what type of interest rates would they be charging someone in that particular situation?
Ray: That’s a great follow up question Victor. Obviously as consumers we’re all concerned with what we pay monthly. Someone who’s completed their bankruptcy and now looking to get a mortgage is going to find if they have re-established credit and they have a reasonable down payment there’s going to be a wide range of lending options.
In the mortgage industry, we group lenders by the quality of the deal. So we have several groups: we have “A” which is prime lending, “B” which is sub-prime; and “C” which is loans of last resort. Now someone who’s completed a bankruptcy is probably looking at an ideal scenario of approaching an “A” lender for a mortgage and if that doesn’t work then we would be looking at a “B” lender.
In terms of interest rates, obviously if you’re borrowing through an “A” lender, you’d be treated as just like anyone else who’s credit worthy – you’ll be getting the very best interest rates that the major banks offer. “B” lenders will charge you an interest rate premium, which depending on the “B” lender, could be anywhere from a quarter-point from prime to up to maybe one and a half percentage points higher than the major lenders.
Our role as mortgage brokers would be to help you to find the best lender for your situation. The main point with being post-bankruptcy is that there is still a wide range of lenders, provided that you set yourself up to be mortgage worthy and that’s really our role – to make you “mortgage-able” following the bankruptcy.
Victor: OK Ray, that’s a great answer and it answers a lot of questions that our viewers may be thinking about.
Now I guess the next question is this: once someone’s re-established their credit, how do they go about finding a mortgage broker? Where do they look and what qualifications would they be looking for in terms of educational requirements, licensing and so forth?
Ray: That’s a great question Victor and obviously as members of the public, we’re all concerned with the trustworthiness of the people that we deal with.
Now as an industry, mortgage brokers are regulated by FSCO which is an agency which stands for the “Financial Services Commission of Ontario” and is an arm of the Ontario government. Under the legislation, both mortgage brokers and mortgage agents have to register with the government and are subject to monitoring for compliance with the regulatory laws.
So for anyone who’s looking to deal with a mortgage broker or a mortgage agent - if they have any concerns, what they can do is that they can call FSCO up and ask the agency for any information regarding the broker or the agent. If there are any complaints or any disciplinary actions that were filed, the government will disclose that and that should satisfy you whether you’re dealing with someone you want to be dealing with.
Victor: Well Ray, that’s a very interesting answer, and I guess I do have one final question for you.
How do you get paid? Do you get paid by the lender that lends the money to the individual client, or does the client pay you? Under what circumstances would the lender pay you or the client pay you and what range of fees are we talking about?
Ray: Well Victor, obviously we provide a service and we’re entitled to be compensated for it.
In general, mortgage brokers are paid in 2 ways. One, the bank sometimes will pay us finders’ fees for arranging a mortgage that suits their needs. In the second instance, sometimes the client pays us a broker fee.
Now whether the bank pays or the client pays depends largely on the difficulty of arranging the mortgage. So for someone who’s been through a bankruptcy and has re-established credit and a down payment, our general approach is to try to get the best loan first and ideally what that would mean is that we’d be able to place a loan with a major lender. Now if we’re able to do that, in most instances the bank will pay us a finder’s fee and we don’t charge the client, and that’s how most good brokerages would operate.
Now if we’re not able to arrange a mortgage through a major lender, then our next approach is to go though an alternative lender and in that instance what generally happens is the lender will charge and underwriting fee and in some instances we may have to charge a broker fee.
Now fees are generally negotiable and what I would suggest for anyone who’s been through a bankruptcy and who’s looking for a mortgage broker is to find someone with whom they feel comfortable and confident and then secondly, negotiate a fee which they feel is reasonable if they have to pay a brokerage fee.
Conclusion
Well this brings us to the end of our little broadcast. I want to thank Ray Kar for sharing his time with us and providing us with this insightful information. If you have any questions, you can contact Ray at (416) 738-8257. Ray also has a website about his business, which is found at www.heromortgage.ca.
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