Bad credit home loans

The average Australian borrower gets a home loan with a clean credit report. But for plenty of people that just isn't an option. Luckily, there are specialist lenders who offer bad credit home loans for Australian borrowers. Bad credit mortgages typically have higher interest rates and more fees, but if a regular lender can't help, it may be your best chance.

Here's what you need to do to find the right loan and increase your chances of getting approved.

What is a bad credit home loan?

At their core, bad credit home loans are similar to regular home loans: You save a deposit, borrow an amount of money, then pay it back with interest. But because you have poor credit, the loan will be a little more restricted or have higher fees and charges.

A typical bad credit home loan has:

• Higher interest rates. Loans for credit-impaired borrowers are usually much higher than the cheapest home loan rates.
• Higher fees. Ongoing and upfront mortgage fees are far more common with bad credit loans.
• Lower LVR. This means you may need to save a deposit greater than 20% of your property's value.

Understanding how you ended up with bad credit

Start by understanding the causes behind your credit problems. You may find your credit history damaged if you:

• Have unpaid bills. Make sure you keep your payments up to date and on time.
• Have been declined for a loan. If you have recently been declined a home loan this will be recorded on your credit file. Many lenders will see this as a sign of impaired credit.
• Made late payments. Late payments will also affect your credit history but they will not have as much of an effect as unpaid bills.
• Have applied for credit too often. It is a general rule of thumb that you should only make an enquiry for credit once every 6 months. Any more than this could raise a red flag to lenders.
• Have been declared bankrupt. If you have been declared bankrupt then you will have a bad credit rating that will stay on your credit history for seven years.

How does your credit affect your ability to get a home loan?

When you apply for a home loan, banks and lenders check your credit file before you can get approved. Your credit file acts as a representation of your credit history and can include unpaid bills, getting declined from a loan, late payments, if you have applied too often or if you have declared bankruptcy.

The lender will check your credit file and if you do have any negative marks, your options will be limited. All your past dealings with borrowed money are collected and used as an indication of your future ability to make repayments.

Fortunately, even if you do have a bad credit history, there are still some options available to assist you in successfully getting a home loan.

• Non-conforming lenders. A non-conforming lender will go outside a regular lender's financial guidelines. This means, they may have different requirements compared to normal lenders' home loans. While these loans are an option for people with bad credit, they come with a few key differences. Loans from non-conforming lenders tend to be risky for the lender, this is why they often charge higher fees and rates to cover themselves.
• Wait for negative marks to be removed from your credit file. Another option you have is to wait for negative marks to be removed. Your credit history doesn't stay on file forever. In most cases, your credit file usually goes back to how it was within 5 years. If you are able to wait for negative marks to be removed, this can significantly help you when applying for home loans.
• Credit repair. Credit repair is the process of an agency refuting any incorrect listings on your file. If successful, you can have these errors removed from your credit history which, in turn, leads to a clean credit file. Keep in mind that this is an expensive process and there is no guarantee that listings can be removed, so be wary of any credit repair agency that claims they will be able to do this.

Can you get a mortgage if you've been bankrupt?

You may be able to get a loan if you're a discharged bankrupt. However, many banks and lenders will assess your application as being too risky and may decline based on your bankruptcy history.

That's why finding a specialist lender is important. Some Australian lenders specialising in lending to people with troubled credit histories include:

• Pepper Money
• Savvy
• Red Rock Mortgages
• Liberty

You can apply for a mortgage from the first day your bankruptcy ends, although your bankruptcy remains on your credit report for 5 years from the start of your bankruptcy, or 2 years after your bankruptcy ends (whichever is later).

Learn more about home loans for discharged bankrupts

9 tips to apply for a home loan with bad credit and get approved

When applying for a home loan with bad credit, there are a number of things borrowers can do to help their chances:

1. Get a copy of your credit file

All of your prospective home loan lenders will have a close look at your credit history before granting you a home loan, so you want to be able to discuss the negative marks on your credit file with confidence. You can get one free copy of your credit file with Finder. This will help keep you aware of any negative listings you might be able to fight against using a credit repair service.

2. Take steps to settle any outstanding debts

New lenders will want to know what you've done to address your past credit mishaps, so ensure that any defaults are paid and you do the right thing by your previous creditors.

3. See if a credit repair service can help you

Some bad credit listings, if placed on your file without proper adherence to the relevant laws, can be removed from your file. A credit repair specialist can help you in this regard. Removing negative listings from your credit file can help you apply for a regular home loan, avoiding the higher fees and interest rates of a bad credit home loan.

4. Apply for a loan with a specialist lender who looks beyond the numbers

Certain lenders in Australia specialise in bad credit home loans. These lenders, such as Pepper and Liberty Financial, look at your credit file and take into account that bad credit can result from a lifestyle change, such as divorce or illness, and will take into account your income and other factors to still grant you a loan, even if you're a discharged bankrupt or have negative listings on your file.

5. Don't apply for too many loans in one space of time

Your credit file includes all previous enquiries for credit, which includes past loan applications. Be careful who you apply for a home loan with if you already have bad credit. Too many enquiries in the same space of time can present another red flag to prospective lenders.

6. Tell your lender about your bad credit listings honestly

As with every lender, a non-conforming lender will look at all the red flags in your credit history. However, they will also ask for an explanation regarding each entry, and you will have to be thorough in the details you provide. If you try to hide something, you won't improve your credit rating. You will simply make the lender more suspicious. This may lead to your application being declined on the grounds that you were not being transparent enough or fully honest about your circumstances.

7. Think about Lenders Mortgage Insurance (LMI) before you apply

In Australia there are only 2 major LMI providers, Helia and QBE. They have their own lending criteria which they use to evaluate your loan, which can in some cases be stricter than that of your lender, leading to your application being rejected. Some lenders don't use these insurers, meaning there's no third party risk of being rejected for a home loan because of LMI. In most cases, these lenders, such as Pepper, have their own LMI alternative.

8. Avoid applying with a spouse who has bad credit if you can

If your partner is the one with bad credit, sometimes you can avoid rejection and the higher interest rates of a bad credit loan by applying as a single applicant. Just keep in mind that applying solo will reduce your borrowing capacity.

9. Eliminate your other debts to make your file look better

When your lender looks at your application, they'll take into account all of your current credit accounts, including credit cards and personal loans. If you can pay these off and close them before applying it'll be one less factor that will work against you when your lender decides whether to approve or reject you.

How mortgage brokers can help you find a bad credit home loan

Mortgage brokers are qualified experts who can help you find a mortgage. They specialise in helping borrowers in unique circumstances who have difficulty qualifying for regular home loans. This includes borrowers with bad credit histories. Brokers can help you find lenders for your situation and help you organise your application to maximise your chances of approval.

A broker's service is usually free because they receive a commission from your lender, not from you.

Learn more about how mortgage brokers can help you

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