Mortgage after Bankruptcy discharge...here's how.
After 30 plus years of lending mortgages, I can honestly say that there is no day that goes by that I have not learned something new about mortgages.
Today's lesson comes after helping a customer obtain a mortgage, after she was discharged from her bankruptcy.
Karen (not her real name) called me from a small town in Alberta. She was discharged from bankruptcy since early 2011 and had been working on re-establishing her credit. Karen had a full time career and was now making a decent income. Every effort to erase her bankrupt past had been taken, except the bankruptcy will remain on her credit bureau for 7 years.
Without taking an initial application, I promised her that I would call around to different lenders, asking for ways of helping Karen with her dream of being a home-owner. I called 5 different underwriters and found that most were not interested, because it was a combination of issues, including the fact that the town did not have a large population base. I finally located one bank rep who was not convinced that it would fly, but they wanted to get my business. He asked me to at least take an application and send it in. So the application and credit bureau were done and a live offer to purchase were sent in to the lender.
The result was a conditional approval at a rate that was not deep discount, but it was still lower than bank posted for a 5 year term.
Now the work began. I needed a letter from Karen with a reason (in her words) that she went bankrupt in the first place. She advised the underwriter that she was in a past relationship and had the stronger credit, so she was asked to sign loans and credit accounts for her past common-law. The relationship ended and her ex common-law immediately went bankrupt. Karen tried her best to honour the loans, but her income at the time was not sufficient. She was insolvent. She declared bankruptcy and was absolutely discharged a year later.
Next, Karen provided me with her income documentation, with a recent pay stub, proving she had been established for 2 years in her career. She now needed to provide me with proof that she could come up with a 5% down payment. She had an RRSP through her employer that had about $4000 in cashable funds (they need to be in place for at least 90 days). She was short about $10,000 overall, so she asked her mom for a gift. Her mom signed the gift letter and she showed the funds being transferred to her account. The gift included enough to cover the $3000 (1.5% of the purchase price) for closing costs.
Her credit bureau needed to show re-established credit with 2 creditors over 2 years. The credit limits needed to be higher than $1500 each.
The underwriter had included in her notes that she wanted to have a copy of the bankuptcy discharge and the statement of affairs. This is where the problem started, because the documents were in storage in another town, in a moldy old banker's box. She could not access the records. Karen was getting nervous and frustrated with the process and actually told me that I could have done a better job, by advising her that these documents were going to be needed, earlier in the process. (That was lesson number one).
The bankruptcy trustee would not be of assistance, because the file was archived and would take 60 days to produce the copies she needed. I asked her to contact the courthouse in Edmonton and ask the bankruptcy administration clerks to provide her a copy. They would have charged $60 and would take at least 2 weeks to find the records. I called a friend of mine who is a bankruptcy trustee. She helped me to locate a file number located with the superintendent of bankruptcies. Karen was given the contact information and called the superintendent's office. Her obsolute discharge summary and statement of affairs were forwarded by email immediately (at no charge).
The bank told me they were looking to make sure that they were not a part of her past bankruptcy, that there was no home-ownership involved in the last bankruptcy and that this was the one and only time that Karen had been bankrupt.
Everything fit. Karen was now able to remove the 'subject to financing' on her offer to purchase.
Lesson number two came today when I was happily believing that I made Karen my biggest fan. She was upset and called me up because she had received a call from her lawyer asking for the entire down payment in trust in two days. She had the gift cash, but was wondering why I didn't tell her to begin the process of RRSP withdrawl. She had no idea how to go about it and the lawyer was not too patient when demanding it. I was able to track down her RRSP fund manager and set them on the trail of an RRSP withdrawl (special CRA withdrawl forms are required).
Every situation is going to be different and I felt pretty good about helping Karen, when all indicators were strongly against success. I am sure that Karen will find her new home just wonderful.