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Bankrupts and home ownership

September 5, 2017

Can bankrupts buy house after they are discharged, and should they?

People filing for bankruptcy either own a house or can’t wait until they repair their credit to the point that buying a home is a reality. But buying a house according to some experts is a fools paradise.

“Will I qualify for a mortgage after filing for bankruptcy?” and “How long after bankruptcy do I need to wait to qualify for a mortgage?” are two of the most frequently asked questions.

The answer to the first question is only “maybe” – to qualify you will need a steady income and a down payment. If you have both of those then answer is probably “yes”. The answer to the second question is also found in the first – if you have a large enough down payment a lender will give you a mortgage.
We have blogged about this before but here are other considerations with home purchasing:

  • Your age – will you be working for the next twenty-five years?
  • Your income – is it enough to allow you to not only afford the mortgage payments but also the taxes, condo fees (if any) and all the maintenance incidentals?
  • Down Payment – is your front money enough to reduce your exposure to higher (than posted) interest rates?

Remember home ownership is no panacea if you own a house you will probably incur these additional expenses.

  • Roof replacement every 10-15 years; furnace replacement every fifteen years;
  • Window and/or door replacement;
  • Electrical maintenance;
  • Plumbing repairs; and
  • All kinds of renovations.

Not only should you contemplate those costs but increases in house value don’t necessarily mean money in your pocket. After all, just to keep pace with inflation your house needs to increase in value by 25% every ten years.

Currently house prices in some markets ae increasing rapidly but that only benefits you when you sell, not you repurchase. If you sell your house with the intention of repurchasing, you will incur more debt on the new property unless you are going to move down to a cheaper property.

Here’s the part where you’re going to get confused:

Also, remember that regardless of the interest rate of the day you will pay about forty percent (40%) of all the interest payable over a twenty-five-year mortgage in the first five years. If you, like many Canadians, refinance to pay down some debts after your first five-year renewal you will add another forty percent of the accrued interest to the purchase price.

If you purchased a house for $300,000 with a minimal down payment at about 3% interest, you would pay a total of around $150,000 in interest over the life of the mortgage. Looking at it another way, you would be paying $450,000 for something that is only worth $300,000 – what a bargain! Then if you refinance after five-years you would add another $60,000 in interest charges – so much for low interest rates you almost doubled the rate all by yourself.

Don’t lose sight of the fact that to keep pace with inflation your house must increase in value by 25% every ten-years. So if after twenty-five years your house sells for $677,344 congratulations you are only out the maintenance and upgrade costs and taxes.

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