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Getting a home loan in spite of a bad credit history

Getting a home loan in spite of a bad credit history

Have you ever forgotten to pay a bill or two? Or previously been declined for a loan? You may be one of the many credit impaired people with a desire to get into the housing market but are unsure if your past is going to catch up with you. RateCity shows you how owning a home can be possible for those with a bad credit history.

May 10, 2010

Credit impairment is the title given to those with a bad credit rating or who are currently having credit issues. A person may become credit impaired if they continuously pay bills (more than $100) over 90 days past their due date, have previously been declined for a loan or have been declared bankrupt. Any credit applications, enquiries and overdue or unpaid accounts will remain on your credit file for five years, while any bankruptcy information is retained for seven years.

When applying for a loan, lenders have access to many of these personal details. Based on this information, as well as other factors such as employment history, your income, assets and savings, they will approve or decline your application. So what can you do if you have a bad credit rating and you want to buy a home?

Obviously it depends on how serious the default is and your situation, but there are some lenders available that offer home loans to help make it possible for you to own your home sooner than you had imagined.

Non-confirming home loans

This type of loan works much like regular home loans and includes many features such as access to an offset account and mortgage portability. However, because the risk is higher for the lender you may be charged a higher rate.

For example, RateCity’s current top rate credit impaired low doc home loan is for 7.15 percent with IMB Banking and Financial Services, compared to 6.09 percent for the lowest advertised variable home loan by Reduce Home Loans.

Also, depending on your situation the loan to value ratio (LVR) is usually higher than it would be for a regular home loan, which means you would need to have a bigger deposit. There are two types of non-confirming home loans available:

  • Low doc home loans: Low documentation home loans are specifically for those who are self-employed or who may be unable to prove their income by showing pay slips or tax returns. Instead of proving your income, you will sign an income declaration which states your ability to pay off the loan.
  • Full doc home loans: This type of loan is based on the applicant providing proof of income such as PAYG tax summaries, pay slips or tax returns. This is seen as lower risk than a low doc loan so usually the LVR is a bit lower.

The good news is that even though you are unable to rewind the clock and change your credit history you now have the ability to create a clearer credit future by buying your dream home with a decent mortgage.

If you want to check the state of your credit history, visit a credit reporting agency online, such as Veda, who will provide you with a free credit report. This way, if you have got a few black marks against your file you can start working on ways of fixing it.

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Learn more about home loans

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.