Foreclosure, Bankruptcy, Consumer Proposal & Credit Counselling

General Lynda Thai-Baird 17 Jul

The Canadian Bankers Association’s latest report on mortgage delinquency shows that Alberta has the third highest per capita of all the provinces at .49%. The national average shows that .25% of home owners are having difficulty paying their mortgage. At first glance these numbers seem relatively small until you note the fine print that “delinquency” in this report only represents those homeowners that are more than 3 months behind.

Here are the highlights of the potential ramifications of foreclosure, bankruptcy, consumer proposal and credit counselling:

Foreclosure

Foreclosure occurs when the mortgage has gone unpaid for an extended period of time that the bank is forced to take back the security for the mortgage which is the home. The foreclosure process is different in every province; and each process can take months to work through for the bank to take possession of the home to be able to sell it to recover their losses. It is important to note that the long-term effect on a client that goes through foreclosure is permanent. A record of the foreclosure is placed on each clients’ credit report. Unlike a bankruptcy or consumer proposal that are eventually removed, the foreclosure stays on the credit report for life. What that will mean is that when you want to eventually purchase a home again, you will more than likely be required to put a minimum 20% down payment and be limited to only certain lenders.

Bankruptcy & Consumer Proposal

Both bankruptcy and consumer proposals are administered through a licensed insolvency trustee. Typically, every creditor that you have debt with will participate in the process. This also includes student loans and arrears with the Canada Revenue Agency. If you have gone through either of these insolvency actions, the mortgage industry views them as them as the same thing. What is most important is to re-establish positive credit history as soon as possible. Consumers that swear off debt of any kind after insolvency are better known as lifelong renters. Never owning a credit card or loan again is certainly fine until you apply for a mortgage to buy a home. Banks and mortgage lenders want to see how a consumer handles small amounts of credit before offering hundreds of thousands in a mortgage. Once discharged from a bankruptcy or consumer proposal, obtaining a secured credit card should be your very first step. The next thing to do is advise both Canadian credit reporting agencies that you were discharged. You may be required to send historical documents related to the insolvency. It is good practice to retain all the paper work from this process in a safe place for at least 10 years as you may be required to submit them to a lender for verification.

Credit Counseling

Credit counselling could be a viable option for those that are keeping up with their debt payments but need assistance in designing a household budget to allow them to get out of debt faster. For those that have fallen behind on their debt payments and have gone into collection status, credit counselling may not an available solution. There are 2 distinct differences between working with a credit counselor and a licensed insolvency trustee:

  • Student loans and debts to Canada Revenue Agency cannot be addressed within credit counseling.
  • If your credit counselling results in the requirement of debt negotiations and/or payment arrangements, some of your creditors may decline to participate. This leaves debts outside of the credit counseling arrangement that you must address on your own. It’s a little like having two flat tires on your car and only one spare. The spare may work well to fix one flat tire, but your car still isn’t roadworthy.

Should you find yourself or someone you know in a difficult financial situation, you can rest assured that there are always options to explore. Seek a credit counselling service provider or debt relief specialist near you, and they will help guide you to a strategy that will be tailored to your specific needs.

Buying a Home with a Rental Suite

General Lynda Thai-Baird 3 Jul

As the prices of homes have elevated in many locations over recent years, often aspiring homeowners will consider buying a property with intent to rent out part of the space, such as a basement or spare bedroom, to tenants or roommates. The benefit of this plan is to use the rental income to offset the mortgage payment, increasing the potential mortgage value a borrower could qualify for.

When the space is a self-contained suite, fully compliant with municipal zoning (i.e. the suite is legal/permitted), the borrower can use the (projected) rental income added to their own to help qualify for the mortgage. For example, a client could buy a legal 4-plex, occupy one unit and use the rent from the other three added to his own to make the mortgage qualifying debt-to-income ratio work.  

However, when the space is a room in your house, or income from a non-permitted (illegal) suite (basement, garage, etc.) that income is generally not allowed to be factored into qualifying as the municipality could force you to shut down your suite. Now this doesn’t mean you can’t rent out a space in your property; it just means you can’t use the projected income to help you qualify for the mortgage because the income is unreliable from a mortgage lender’s point of view.

To prove the amount of rental income a legal space could generate, lenders often require an independent assessment from a licensed property appraiser. Your mortgage professional would help you coordinate this. If leases are already in place, then those can be used to prove income instead.

When you, as the owner, occupy the property; the minimum down payment is as low as 5% provided the property is a 4-plex or less. When you do not intend to live in one of the units, then the down payment requirement is much higher, currently 20% down for a non-owner-occupied rental.

Certain lenders are better to work with than others for qualifying mortgages where the potential rental income is required to make the numbers work. Contact me today for more information.