Your credit score is one of the crucial factors that lenders consider when deciding whether to let you borrow money for a home. In Australia, credit reporting bureaus consider both positive and negative incidents when calculating your credit score. Any negative incidents in your credit file will be present for many years, depending on their seriousness. These incidents can cause lenders to pause when considering your application. Recent incidents that haven’t been resolved can be more critical. For instance, lenders may not approve your home loan application if you’ve defaulted on past debt and are still working on clearing it.
If you’ve already cleared your past debts and are taking steps to repair your credit score, lenders may view your application favourably. You should be prepared to answer lenders’ questions about these debts. Even with these positive steps towards clearing your debt, lenders may not offer you a home loan that matches those that don’t have credit issues. Still, repaying a home loan on these, less desirable, terms can boost your credit score, which can then get you better terms if you refinance the loan later. You can consult a mortgage broker who can help you connect with a lender to suit your needs.
What are the home loan options for someone with a bad credit history?
A standard home loan usually allows you to borrow up to 80 per cent of your home’s value. If you have bad credit, lenders may offer you this loan type with a higher interest rate. You may also miss out on other benefits that someone without any credit issues may receive, like bonuses or fee discounts. If you can afford the repayments at a higher interest rate, even for a few years, and keep up with them without issues, this may help to improve your credit score. You can then refinance to a home loan at better rates and terms.
Some lenders may offer you a home loan with a loan-to-value ratio (LVR) over 80 per cent, but they’ll probably require you to buy Lenders’ Mortgage Insurance (LMI). This raises more issues because your bad credit history may cause the insurer offering LMI to deny your application. The lender will then have to deny your application for a home loan. These declined applications will then be noted on your credit file as negative incidents. This can worsen your credit-related issues, which is something to avoid. A mortgage broker can help talk you through how to best approach getting a home loan with bad credit without negatively impacting your score.
What do I do if I can’t get a suitable home loan approved?
If you’re not able to get approved for a suitable loan, your first step is to speak to the lenders. You can see if they offer guarantor loans or allow co-signers to sign onto the home loan as well. Before exploring these options, you’ll need to have someone willing to go guarantor or be a co-signer. The co-signer must be willing to take responsibility for the home loan repayments if you fail to repay them. A guarantor similarly has to be willing to take responsibility for the home loan but only after you’ve exhausted all options. A guarantor also risks losing the property they have to use as security. These are just some ways borrowers with bad credit have secured home loan. Bad credit borrowers may find it easier to secure a home loan with a mortgage broker’s assistance.
Speaking to a financial advisor or a mortgage broker can help you confirm if your financial situation allows you to apply for a home loan. A mortgage broker could also recommend the right lender after reviewing your situation.
If you’re going through a bankruptcy which is listed on your credit report, your bankruptcy trustee will need to approve any debt you plan to take on. Ideally, you shouldn’t apply for a home loan or other debt until the trustee feels that you should do so. Even if you have no debt defaults you’re working to clear; you may want to improve your financial circumstances before applying for the home loan.