Bad Credit Home Loan

 

Bad Credit Home Loan – Having bad credit shouldn’t stop you from getting a home loan and owning your own home or investment property. Due to uncontrollable life events, such as suddenly Bad Credit Home Loanlosing your job, going through a separation or divorce, or experiencing a sudden illness, you may find it difficult to keep up with your financial commitments.

Thankfully, there are a range of specialist lenders and brands in Australia who will accept borrowers with paid and unpaid defaults, discharged bankruptcy claims, mortgage arrears and a high number of credit enquiries on their credit files. The products offered by these lenders are known as non-conforming home loans or bad credit home loans and are very flexible with lending conditions, usually also being offered to self-employed borrowers.

Read through the guide below to find out about bad credit and how it can affect your home loan chances.

What is bad credit?

Bad credit occurs when you get one or more negative listing on your credit file, or you have a low Equifax score. Depending on how many and the type of listing, it could decrease your chances of getting a loan with a typical lender dramatically. Below are some examples of what a bad credit file contains:

  • Unpaid bills – One of the main ways that people will get a bad credit history will be because they have unpaid bills. Make sure you keep your payments up to date and on time and try to pay them back as soon as possible.
  • Late payments – While late repayments will affect your credit history, they will not have as much as an effect as unpaid bills.
  • Previous credit rejections – If you have recently been declined a home loan, credit card or personal loan then you may get a bad credit rating from this. Many lenders see rejections as a negative thing, as it shows you’re careless about your credit file.
  • Applying too often – Tying in with the point above, it is a general rule of thumb that you should only make an enquiry for credit once every 6 months. Any more than this could raise a red flag to lenders, as it could show that you’re struggling financially and require credit.
  • Bankruptcy – If you have declared bankrupt then you will have a bad credit rating that will stay on your credit file from five to seven years. Even if you’ve been discharged, your name stays on a Solvency Index. Lenders can access this Index at anytime.

Am I eligible for a bad credit home loan?

All is not lost as there are credit impaired home loans are available if you can meet one or more of the following criteria:

  • If you are not currently bankrupt or in a Part 9 (IX) creditor agreement within the Bankruptcy Act. You can apply for a home loan with Pepper one day after being discharged. You’ll need to wait two years for other lenders.
  • If you can put together a minimum deposit of at least 10% (or have enough equity in the property you want to refinance). Non-conforming home loans will usually lend out a maximum of 80% – 90% of the property value but any First Home Owner Grant (FHOG) you may be eligible to receive can be included as part of your deposit.
  • You will be required to find money to pay any stamp duty and other costs outside of the loan allocation funds.
  • A guarantor does not give relief from the necessity of you having to post the required deposit.
  • You will still have to put up the required deposit.
  • You will need to prove you have a sufficient, ongoing income to service the loan repayments. Usually people rely on just pensions or those who are unemployed can not obtain a non-conforming home loan.
  • Any outstanding debts, whether in default or otherwise must usually be declared and fully consolidated into your new mortgage and be fully paid out on settlement. Even taking into account of the consolidation of all outstanding debts your new home loan can still not exceed the LVR as set out by the lender.

How do I get a home loan with bad credit?

One of the main factors that will determine whether you will be accepted will be your income and the nature of your bad credit. Typically, if your bad credit was triggered by a life event then lenders tend to be more understanding. However, if you were aware of your bad credit but continually and knowingly made it worse, then lenders may be more skeptical. Regardless, researching about your options, attempting to fix up your credit and choosing a specialist lender to go with should help you get back on track.Research what options you have:

  • Opt for a specialist lender – There are number of lender who specialise in dealing with borrowers who have bad credit. These lenders will normally have a criteria in place, such as a deposit of at least 10%, not currently in mortgage arrears and not currently bankrupt.
  • Speak to a mortgage broker – A mortgage broker could have access to a few bad credit home loans in their database, so it’s worth calling up and asking what your options are.

Develop a plan to get your credit file back on track:

  • Saving up for a deposit – Getting back on track is the first step to saving up a significant deposit. This could include finding employment and gradually saving up the amount you need.
  • Credit repair – While bigger impairments such as bankruptcy are hard to repair, the smaller impairments such a late repayments, inquiries and defaults can be paid back and removed from your file.

Can I qualify for a bad credit home loan if I’m a first home buyer?

You can still apply for a bad credit home loan if this is the first home loan you’re applying for and you have the deposit ready. The same tips and information on this page applies to first home buyers, as applying for your first home loan as opposed to your second or third makes no difference to your eligibility all things being equal.

Keep in mind that if you’re applying for your first home loan you should still be careful of your income and your deposit size. This is because unlike a buyer with a proven track record of paying off a home loan, you might not have an extensive credit history your lender can look for, so the other aspects of your application will come under more scrutiny.

What do lenders assess in terms of credit history?

When a lender conducts a credit history check, they look at a number of factors which are then used to determine whether the applicant poses too much of a risk for them to approve their loan.

  • Credit application frequencyOne thing all lenders analyse when assessing your credit rating is how often you apply for credit. The higher the number of applications registered in your credit history file and the more frequent they are, the less chance you will have of getting a loan. Of course, they will first ask you if there was a good reason for the frequency of the applications. Also, a lender could reject the application if there are a lot of credit applications on file but the borrower claims to have only a few debts. This is because the lender could simply believe that the applicant is being untruthful about their existing loans.
  • Type of credit applied forThe type of loans you applied for will also be important to a lender analysing your credit history. For example, someone who has applied for a large number of credit cards may be declined immediately because it leads the lender to believe that such an applicant is too reliant on credit. On the other hand, someone who has a large number of applications for home loans is understandable because they could simply be looking to find the cheapest offer.
  • Defaults, bankruptcies and other red flagsAs with every lender, a non-conforming lender will look at all the red flags in your credit history. However, they will also demand an explanation regarding each entry and you will have to be thorough in the details you provide. If you try to hide something, you won’t improve your credit rating, you will simply make the lender more suspicious and this may lead to your application being declined on the grounds that you were not being transparent enough or fully honest about your circumstances.

My partner or spouse has bad credit, does that affect me?

If you decide to apply as a joint application for your home loan, your lender will take into account your partner or spouse’s bad credit history. While your good credit history may offset some of that, the banks will make an assessment based on the whole and will let you know of the outcome. If you’re declined by a typical lender, then you may need to speak to a bad credit specialist lender.

Can I get a home loan with paid defaults on my credit file?

You can still get a home loan if you have paid defaults on your credit file. These will appear on your credit history and your success will depend on the lender’s policy.

Do you qualify for a bad credit home loan?

The answer to this question will depend on the loan you apply for. Some lenders will clearly state which loans cater to which types of bad credit. Generally speaking, there are loans offered to most types of bad credit applicants, with the worst cases receiving higher interest rates.

Are there different types of defaults?

Defaulting on a utility bill and defaulting on a home loan payment are different things. Missing your utility bill payment will be listed as an unpaid default on your credit rating. By comparison, being ‘in default’ on your home loan means you have unpaid arrears outstanding on your account that need to be paid. If you are in default on your home loan, chances are the amounts you owe are much higher than just the missed payment amounts. This is because your lender is likely to charge you overdue fees or missed payment fees, along with default penalty interest rates on top of your regular interest charges.

Are there banks that overlook defaults on bad credit?

Yes, there are a number of non-conforming lenders within Australia that will overlook your bad credit history. Aside from this, many of the big banks may overlook a small default if your application is particularly strong.