Getting a home loan in spite of a bad credit history

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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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