You can’t always control the red marks on your credit file and, sometimes, your credit score takes a hit through no fault of your own. For instance, you may have missed out on a bill payment while on a holiday or fallen behind on loan repayments due to losing your job. Unfortunately, negative incidents stay on your credit file for a while. Since lenders use your credit history to determine your reliability as a borrower, they may not give you the preferred home loan terms if you have a bad credit history.
One way you can work around this is to find a co-signer, who could be your family member or a friend. It’s important to note lenders may expect your co-signer to offer their home as security for your loan. If neither you nor your co-signer can pay back the home loan in full, the lender could repossess their home. You’ll therefore need to find a co-signer who is willing to take on this significant risk. Consider checking if your lender will accept other kinds of security from the co-signer.
How does getting a home loan with bad credit and a co-signer work?
When you submit your home loan application, the lender will review your credit report to gauge your chances of defaulting, or not repaying the home loan. A history of bad credit issues, such as missed repayments and bankruptcies or insolvency proceedings, usually mean lenders may require information from you regarding your attempts to improve your credit score. For instance, you may be taking on manageable debt and making timely repayments, impacting your credit score positively. If such attempts don’t convince the lender, they can refuse to offer you the loan. Even if they do offer you a loan, they may limit the amount you can borrow or charge you a higher interest rate.
If you get a co-signer to apply for the loan with you, you will both be responsible for the loan. The lender will review both your incomes, savings, and credit histories. If you have a bad credit history, but your co-signer has an excellent one, the lender may let you borrow at much as 80 per cent of your home’s value, perhaps without charging you higher interest.
Again, if you’re working on improving your credit score, you can discuss this with the lender and maybe only have your co-signer on the loan agreement for a predetermined period, such as the first year or two. This would reduce the risk your co-signer faces but still help you get the home loan.
What options do I have if I don’t find a co-signer?
It can be challenging to get someone to agree to co-sign on your home loan agreement, given the financial risk involved. However, if you are facing credit-related issues, you don’t have too many options.
You could try looking for a guarantor who undertakes to pay off your loan and borrow almost the entire cost of your home. The difference is your guarantor is likely to be the last resort for the lender to recover the amount loaned to you, but a co-signer would be the first person the lender contacts if you miss a payment and cannot be contacted.
Alternatively, you could wait till your credit score is at a reasonable level again before applying for a home loan. You can create a track record of responsible financial transactions, and demonstrate to lenders that they can trust you to repay the home loan based on these recent incidents. This would also give you the time to build up your savings, bringing down the amount you’d need to borrow from the lender as well as the amount you’d need to repay.