When looking at debt solutions, a consumer proposal is one of the most efficient options, giving you legal protection while only paying a portion of your unsecured debt. However, one crucial question often arises is how a consumer proposal impacts your home or mortgage.
This blog will look at the implications of a consumer proposal on an existing mortgage and how it may affect your ability to buy a home in the future.
What is a Consumer Proposal?
A consumer proposal is a legal agreement negotiated between you and your creditors through a Licensed Insolvency Trustee. It is a legally binding agreement between you and your creditors to pay back a previously negotiated part of your debt in monthly payments over up to five years. Basically, you and your trustee will discuss your financial situation to determine how much of your total unsecured debt you can reasonably afford to pay back.
The trustee then will prepare a proposal to submit to your creditors, outlining the payment plan, for them to approve. After the approval has been made, you have to follow the payment plan and any other stipulations strictly. Once you have completed all agreed-upon payments, your creditors will discharge the remaining debt, and you will be debt free.
Will a Consumer Proposal Ruin My Credit?
Filing a consumer proposal tells creditors you can no longer make the required payments. This usually means you are already behind on payments and likely have been receiving collection calls.
So while a consumer proposal will not necessarily “ruin your credit,” your credit rating has likely already taken a hit from being behind on payments. It will, however, still negatively affect your credit score. A consumer proposal will result in an R7 rating, indicating that you have entered a debt repayment management plan.
This rating will remain on your credit report for 6 years from the date the proposal is filed or three years from the day the proposal is complete, whichever comes first, and can severely affect your ability to be approved for loans.
Will I Lose My Home if I File a Consumer Proposal?
No. One of the most significant benefits of a consumer proposal is that your assets are protected. This means you can keep your home and any equity in your home even when you file a consumer proposal.
A Licensed Insolvency Trustee (LIT) will work with you to review your financial situation to negotiate repayment of all or part of your total unsecured debts with your creditors.
Any equity you have in your home should be considered in the negotiation, but once the consumer proposal is approved, you can keep your home. You will pay your creditors an equivalent of your home’s equity amount.
Will Filing a Consumer Proposal Prevent Me from Buying a Home?
Just like you can keep your home when you file a consumer proposal, it will not prevent you from buying a home. Your consumer proposal will remain on your credit report for 6 years from filing or 3 years after the final payment; you still can build your credit back up to increase your chances of qualifying for a mortgage.
You must remember that regardless of a consumer proposal, your chances to qualify for a mortgage increase with a reliable income, a significant (20% or higher) downpayment, and a good credit score.
So while you can apply for a mortgage after a consumer proposal plan, we strongly recommend building your credit and saving for a substantial downpayment to increase your chances of being approved for a mortgage.
Consumer Proposal and Mortgage
It is critical to remember that a consumer proposal does not affect any of your secured debt, such as a mortgage or a car loan. So you will have to continue to make mortgage payments regularly, or you may risk the lender seizing your home.
If you keep your mortgage payments current and on time, your mortgage renewal should not be a problem, as most lenders will not require a new credit application for renewal. However, this does not mean that your lender may not ask for an updated credit report. A consumer proposal will impact your credit rating, so in a rare circumstance such as this, your ability to renew your mortgage at preferred rates may be negatively affected.
If you want to switch lenders or refinance your mortgage, you must submit a new credit application, which would then consider the impacted credit rating. This may lead to higher interest rates or a denial of your application.
How to Qualify for a Mortgage After a Consumer Proposal
As odd as it may sound at first, you can use a consumer proposal as an opportunity to start working on building credit and save up money for a downpayment.
A consumer proposal allows you to reduce your total unsecured debt, lower your monthly payments and/or adjust the time you have to repay. This is the perfect time to set up a budget and financial plan.
During your financial review with the LIT, you will have received a list of all income and expenses, which you can use to set up a budget. Ensure all bills are paid in full and on time to help you regain your credit score.
You can use the savings from your consumer proposal and put them toward a savings account to build up funds that you can use toward a downpayment for a new home.
Generally, lenders will look at the following criteria when evaluating your application for a prime-quality mortgage:
- A two-year timeline after discharge from your consumer proposal, during which you have established a new, better credit rating.
- Approximately $2500 in new credit,
- Two or more new credit facilities (such as a line of credit or a new card); and
- How much of a downpayment you can make on a new property?
These steps are critical as they will not only help you increase your chances of being approved but also that you might qualify for a more affordable interest rate.
What if my spouse has great credit? Does that increase my chances of qualifying for a mortgage?
If your spouse has excellent credit and only you are filing a consumer proposal, they should apply for the mortgage loan and, if required, have you as a co-signer. This would be an excellent option if you could not rebuild your credit sufficiently to qualify for a mortgage before planning to apply.
It is important to note that if you already have a mortgage, it will not be affected by a consumer proposal if you continue to make your payments on time.
Will Filing for a Consumer Proposal Affect My Mortgage Renewal?
It depends on whether you intend to stay with your current lender, switch lenders, or refinance your mortgage.
In the first scenario, as long as you keep your mortgage payments current and on time, your mortgage renewal should not be a problem, as most lenders will not require a new credit application for renewal. However, this does not mean your lender may not ask for an updated credit report. A consumer proposal will impact your credit rating, so in a rare circumstance such as this, your ability to renew your mortgage at preferred rates may be negatively affected.
However, if you want to switch lenders or refinance your mortgage, you must submit a new credit application, which would then consider the impacted credit rating. This may lead to higher interest rates or a denial of your application.
Call Risman Zysman today at 416-222-4600!
If you have further questions about how a consumer proposal can affect your mortgage, the experienced LITs of Risman Zysman are here to help. Our debt relief professionals are happy to help you review your finances, answer any questions, and help you determine the best debt solution.
Risman Zysman has over 45 years of experience providing quality debt solutions. Our team of professionals understands the fears and frustrations of individuals facing financial difficulty. At Risman Zysman, we present each client with a full range of options and guide them to make the right choices so they can move forward.
To find out how we can help you, call us at 416-222-4600 and get a free, confidential, no-obligation consultation today! Risman Zysman can help you on the road to financial recovery.