The Definitive Mortgage Qualification Battle: Debt Settlement vs. Consumer Proposal and Bankruptcy—What You Need to Know Now

So, you’re dreaming of that perfect home, and you’re ready to take the leap into the world of a mortgage. But hold on! Before you dive in headfirst, there’s something you need to know: if you want to qualify for a mortgage, you’ll want to steer clear of debt settlement, consumer proposals, and especially bankruptcy — they can seriously impact your chances.

Credit card debt can be a real burden, and that line credit isn’t doing you any favors either. But enrolling in a consumer proposal or bankruptcy can be a major roadblock on your path to home ownership. These options can leave a lasting mark on your credit score for up to 8 years, and a mortgage lender, including B lenders, see them as instant red flags. But fear not! There’s a better way to tackle your debt and still achieve your dream of owning a home: debt settlement.

Why is debt settlement the better option to qualify for a mortgage? Let’s break it down:

1. Improve Your Credit Score to Qualify for a Mortgage:

With debt settlement, you have the chance to negotiate and settle your debts with your creditors, which can lead to a significant improvement in your credit report and credit score. As your debts are settled and the balances updated to zero, your credit score can start to rebound. A key factor to qualify for a mortgage is your debt-to-income ratio, and by completing a debt settlement program and becoming debt-free, you’ll have a better debt-to-income ratio, which can help you rebuild your credit score.

In contrast, a consumer proposal and bankruptcy can seriously damage your credit report. Not only that, but with these options, you won’t be allowed to have any credit at all. No credit cards, no online purchases, no credit to rely on in case of emergencies. It’s a tough spot to be in when you’re trying to rebuild your credit score.

2. Debt Settlement Looks Better to a Mortgage Lender:

Most lenders won’t deny you a home loan just because you’ve settled your debts in the past. While debt settlement, like any debt solution, will impact your credit score, the mark left by a debt settlement is usually less severe than that of a bankruptcy or consumer proposal.

Here’s why: once a debt is settled, the balance is updated to zero on your credit report. While it may be marked as “settled,” it’s still considered less severe than a formal insolvency. Plus, you can even request that your account be marked as “paid in full” on your credit report, which looks even better to potential mortgage lender.

By negotiating a settlement for less than the balance owing, debt settlement can help lighten your debt load and potentially increase your credit score, making you a more attractive borrower to a mortgage lender. A lower debt-to-income ratio can also lead to a higher loan-to-value ratio, which can improve your chances to qualify for a mortgage.

3. Lighter Debt Leaves More for a Down Payment:

With debt settlement, you’ll learn to manage your money and save. You can use the same practices to build up a down payment for your future home. The larger your down payment, the less risky you’ll look in the eyes of a lender. While it’s not uncommon for lenders to require a down payment of 5-20%, having a substantial down payment can help you secure a mortgage with better terms.

On the other hand, if you’ve filed a consumer proposal or bankruptcy, you’ll need to wait at least two years and have at least one year of re-established credit before you can even think about a down payment. Plus, keep in mind that you may also be required to pay a lender commitment fee, which can add to your upfront costs.

The Bottom Line

If you want to qualify for a mortgage and buy a home, it’s best to avoid a consumer proposal and bankruptcy. These debt relief options can have a negative impact on your credit score and make it challenging to get a mortgage in the near future. Instead, consider debt settlement as a viable alternative that can help you improve your credit score, look better in the eyes of a lender, and save for a down payment.

Don’t be shy, call or message Gem Debt Law for a free consultation with someone from our legal team. Gem has representatives available to discuss your situation throughout the daytime and evening, regardless of your time zone. You can book an after hours appointment, to accommodate your work schedule and family life. 

We look forward to hearing from you!