There’s no doubt that bankruptcy can be life-changing. But, that doesn’t mean you cannot build your life again by getting a home loan. While it’s true that some lenders refrain from even considering a home loan application from someone who has declared bankruptcy in the past, there are some who might offer you a loan if you’ve been discharged. To improve your chances of getting a home loan after a bankruptcy discharge, you will need to be aware of the steps you can take to strengthen your application.
What is a discharged bankruptcy?
As the name suggests, when you’re discharged from bankruptcy, you no longer need to adhere to the rules and regulations, such as owning limited assets and not being able to travel overseas.
Moreover, from a financial point of view, you can now legally apply for credit again. However, your credit history will still show that you were bankrupt in the past. This is why some lenders may be wary of considering your home loan application, even if you’ve been discharged.
How long does the bankruptcy stay on my credit file?
Typically, the record of the bankruptcy will remain on your credit file for:
- Five years, starting from the date you declared bankruptcy, or
- Two years, starting from when your bankruptcy ends, whichever is later.
In addition to this, a permanent record of your bankruptcy is also listed on the National Personal Insolvency Index (NPII). However, it’s possible that this doesn’t impact your home loan application, as while all lenders will check your credit file with Equifax, Experian or Illion, not all lenders check the NPII.
Either way, it’s best to let your lender know in the very beginning that you had declared bankruptcy in the past, as this will help to build your credibility and prevent unforeseen delays in your application processing.
When can you apply for a home loan after bankruptcy?
This depends on the lender as some specialist lenders may accept your home loan application the day you’ve been discharged from bankruptcy, while others may need you to wait for at least two years before you can apply.
Regardless of the duration, your application is more likely to pass with a low interest rate if you start building and maintain a good credit score. So, you could consider waiting for a year to build a strong credit score after being discharged and then apply to a specialist lender.
Is the mortgage higher for discharged bankrupts?
Due to past bankruptcy, you might be considered a high-risk borrower to most lenders. Hence, if you’re applying for a home loan after bankruptcy discharge, you might have to bear additional expenses.
For example, mortgages on home loans range from 5 per cent to 20 per cent, which means that the LVR is a minimum of 80 per cent. However, as a discharged bankrupt, most lenders tend to provide between 55 to 70 per cent of the property’s value. Hence, it’s likely that you’ll have to pay a larger deposit due to the higher LVR. Also, your home loan likely has significantly higher interest rates. Do remember to compare various options to get a suitable deal.
How to rebuild a positive credit history after bankruptcy discharge
1. Never miss a bill payment
As a discharged bankrupt, it’s more important than ever to pay your bills on time, including utilities and rent. If you miss even a single payment, your credit file may give the impression that you’re a repeat offender. Also, consider avoiding applying for credit immediately if possible, or only apply if you know you’ll be able to repay it on time.
2. Start saving
By showing that you have a chunk of savings to your lender, you can build credibility and prove that you’re in a stable financial position to make regular home loan repayments. Think about starting to make regular deposits into your savings account.
3. Do your research
It’s critical to understand that each lender has a different policy when it comes to considering home loan applications, especially from discharged bankrupts. Approaching one that is not likely to suit you actually increases the risk of your future applications being denied. This is because every credit query is recorded on your credit file. Hence, the more lenders that decline your application, the greater negative impact on your credit history.
So it’s best to do your research and compare various lenders that offer home loans after a bankruptcy discharge in Australia to find the right option for you.