If you are having financial difficulties, filing for a consumer proposal can be a smart way to protect yourself from creditors and negotiate to pay a portion of your debts. But it’s fair to wonder how a consumer proposal affects your home or qualifying for a mortgage.
The good news is that a consumer proposal can help relieve your debt all while protecting your assets – including your home. In this guide, we explain how filing for a consumer proposal may impact your home or existing mortgage, or ability to buy a home.
What is a Consumer Proposal?
A consumer proposal is a legally binding process that helps you negotiate your debt with creditors or extend the amount of time you have to pay off your debts. Administered by a Licensed Insolvency Trustee (LIT), a consumer proposal can be filed to help alleviate you from the financial stress of paying down your debts.
By filing a consumer proposal, you also receive immediate protection from creditors. This means that they can’t continue to pursue you for payment until negotiations are made. This can buy you some time when it comes to paying down your debts and/or reduce your debt payments.
Will a Consumer Proposal Ruin My Credit?
When you file a consumer proposal, you are essentially telling your creditors that you can no longer make the required debt payments. So while a consumer proposal may not “ruin” your credit, your credit score will likely be negatively affected.
However, keep in mind that your credit score may take a dip just as it would if you were to simply stop making your payments. Your credit score may already be dinged by unpaid or late accounts on your file. Filing a consumer proposal will result in either an R7 credit rating, but this may still be the preferred outcome compared to not making any payments at all.
Will I Lose My Home if I File a Consumer Proposal?
No. One of the benefits of filing a consumer proposal is that your assets (including your home) do not vest on the Trustee for the benefit of creditors, as it is the case in a Bankruptcy scenario. This means that you can keep your home (and any equity you have in your home) even while you seek debt relief.
In filing a consumer proposal, you’ll be working with a LIT to negotiate with creditors repayment of all or part of your total debts. Therefore, any equity available in your home should be considered when you are negotiating your offer. The good news is that, once the consumer proposal is approved by the creditors, you get to keep your home, while paying your creditors an equivalent of the home equity amount over a determined period of time.
Will Filing a Consumer Proposal Prevent Me from Buying a Home?
Likewise, a consumer proposal does not prevent you from buying a home. Though your proposal remains on your credit report for 3 years (after final payment of the agreement), you still have the opportunity to build up your credit to increase your chances of qualifying for a mortgage.
As with any home mortgage application, your chances of acceptance increase if you have a good credit score, a significant (20% or higher) downpayment, and reliable income. We highly recommend improving your credit score over time and saving up for a down payment to increase your chances of qualifying for a mortgage loan.
Consumer Proposal and Mortgage
If you are struggling to pay off your debts, a consumer proposal may be a smart option for you. This will help you pay down your debts under terms that you can afford, significantly reducing the financial strain on you and your family.
While this legal process does affect your credit rating, it will not ruin your chances of securing a mortgage or buying a new home.
At the same time, a mortgage lender cannot change the terms of your mortgage simply because you filed a consumer proposal. This can only occur if you have missed your payments. Once you have made your payments and adhered to the conditions outlined in your consumer proposal, your outstanding unsecured debts are erased.
How to Qualify for a Mortgage After a Consumer Proposal
A consumer proposal allows you to reduce the debt, lower your monthly debt payments and/or adjust the amount of time you have to pay off your debts. With this added flexibility, it is then a smart choice to create a budget and start building up your savings. Doing so will help you save up for a downpayment, increasing your chances of qualifying for a mortgage.
At the same time, you should also focus on paying your bills in full and on time in order to build up your credit. Mortgage lenders will be looking at your credit score to determine if you qualify for a mortgage and for how much.
To qualify you for a prime quality mortgage, mortgage lenders will be looking at these factors:
- Whether you have improved your credit rating after the completion of your consumer proposal. Approximately $2500 in new credit to your name.
- The establishment of two or more new credit facilities, like a new card or line of credit.
- How much you have saved for the down payment of your new property.
In short, the best way to increase your chances of qualifying for a mortgage is to pay your bills on time and saving. This will help you build up your credit after your consumer proposal, making you a more appealing candidate for an affordable mortgage rate.
What if my spouse has great credit? Does that increase my chances of qualifying for a mortgage?
If you are hoping to buy a home and your spouse has good credit, then they may be able to apply for a mortgage loan and add you as a co-signer. This can be a good option if you aren’t able to build up your credit to a qualifying level before you plan on applying for a mortgage
Also note that if you are already a homeowner, your mortgage will not be affected as long as you continue making your payments – whether you filed for the consumer proposal yourself or you and your spouse filed jointly.
Will Filing for a Consumer Proposal Affect My Mortgage Renewal?
As long as you have been making your mortgage payments in full and on-time, you should be able to renew your mortgage with your existing lender, even if you have filed a consumer proposal. This is because your existing lender is unlikely to require a new credit application if you are filing for mortgage renewal. If you switch lenders, however, you will need to file a new credit application.
Keep in mind that filing a consumer proposal will impact your credit rating and this could affect your chances of getting the best rates. With that in mind, your best bet is to do everything you can to improve your credit by paying off your debts.
If you have more questions about how a consumer proposal affects your home or mortgage, we’re happy to help. Contact our debt relief professionals to determine whether filing a consumer proposal is the right debt relief option for you.