Your credit history may be more important than you think when applying for a home loan, but there are options available is you have a bad credit history.
A home loan involves a financial provider lending you an agreed amount of money to purchase a home. Home loans have terms and conditions that are set by the financial lender and agreed upon prior to entering into the loan. Credit plays a huge part in whether your home loan application is approved or not.
Lenders need to see proof that you have a good credit history and that you will be able to pay back the money you have borrowed from them. Your credit history could be the difference between you being successful when applying for a home loan or being unsuccessful. It’s important that you be mindful of your credit history.
How does your credit affect your ability to access home loans?
Your credit history directly impacts on your ability to access home loans. 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 is used as an indication of your future ability to make repayments. This is why your credit history is so important when applying for loans.
How do home loans work?
A home loan is one of the most popular options when you are in need of money to purchase a home. Home loans are provided by banks, financial lenders and credit unions. If you are unsure how to select a home loan or don’t have the time or financial know-how, you may chose to utilise a mortgage broker. A mortgage broker acts and negotiates on your behalf to find you the best home loan depending on your situation.
Home loans aren’t just used for purchasing a home to live in. They can be taken out when you are building a home or when you are investing in a property. Most people can have access to a home loan, even first home buyers. You can typically apply for a home loan online, over the phone or in person. You can also apply for a home loan through your mortgage broker.
You repay your loan and interest in the form of regular repayments. Every month you are required to make at least one repayment to repay back the value of your home loan along with the interest you have accumulated. Some home loans allow you to make weekly or fortnightly repayments to help you pay off your loan sooner.
Home loan options with bad credit
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 lender’s 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 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 five 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.
Improving your chances of being approved for a home loan
There are a few different ways that can help you improve your credit file and chances of being approved for a home loan, including:
- Regularly check your credit file. Doing this will ensure that banks or lenders don’t incorrectly place negative listings on your file. It’s also an important step in safeguarding yourself against identity theft. Checking your credit file will ensure there’s no errors and if there is something wrong, fixing the errors will improve your chances of being approved for credit.
- Pay bills on time. Ensuring you pay your bills on time is one of the most simple ways to improve your credit rating and keep your file clean. You will also look like a responsible borrower to potential lenders.
- Consider debt consolidation. Debt consolidation is when you consolidate all your debts into one. It will make your repayments easier, as you will only have the one to worry about, and you can significantly reduce your interest. Getting in control of your debt can assist you in improving your credit history.
- Refinance. You may also want to consider refinancing. Making the switch may help you better manage your debt or find a more suitable home loan for you. You shouldn’t rely on refinancing as a way to get you out of trouble, however, it could potentially improve your chances of success when applying for a home loan.
- Don’t apply for too many loans. Applying for loans too often and being unsuccessful can hurt your credit rating. Making too many enquiries will raise red flags to lenders as it may indicate that you are irresponsible.
Types of home loans
Not everyone is in the same position when borrowing money, and not everyone has the same financial needs. This is why there’s a range of different home loans available so you can select one that best aligns with what you need.
- Variable. These types of home loans offer a variable rate, meaning your interest rate typically adjusts with the Reserve Bank of Australia (RBA) cash rate. These loans allow you to take advantage of low interest rates, but you must also be prepared for rate rises. Variable home loans tend to have more flexibility and more features.
- Fixed. Fixed rate home loans are a secure form of borrowing as your interest rate is fixed for a period of time. This means your repayments will stay the same and won’t change during the fixed period. They allow for budgeting and also give you security as you are protected from interest rate increases. However, they aren’t as flexible as variable loans and may not offer the same features.
- Line of credit. A line of credit works differently to a normal home loan. You agree upon a set credit limit, which is normally quite high. You don’t need to make repayments every month and you can take out additional funds when you need to, as long as you don’t go over the agreed-upon limit. It’s important to keep in mind that at some point you will still have to pay off your line of credit.
- Low doc. Low doc home loans are just as the name suggests. They require a low amount of documentation in the application process and are appropriate for those who own their own business or are self-employed. Typically you would take out a low doc home loan if you can’t provide the normal documentation required for a home loan, such as evidence of a regular salary.
- Construction. Construction loans are designed for those who are building a home. You can often use the home loan to purchase the land and arrange for contractors to build your home. Instead of making repayments, you make ‘progress draws’. This works as a percentage of the total building costs, payable to the builders through the building process. You typically don’t begin to make principal and interest repayments until your home has been built.
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Remember that to be eligible for most home loans in the market, you'll need a good credit history because the loan amounts are big. If you have bad credit, you may want to consider repairing it first so you can have lower interest rates.