Paid or unpaid defaults? Discharged bankrupt? Learn what you need to do to get a home loan.
Due to uncontrollable life events, such as suddenly losing your job, going through a separation or divorce or experiencing a sudden illness, you may have ended up with some bad marks on your credit. However, having bad credit may not preclude you from getting a home loan and owning your own home or investment property.
Thankfully, there are a range of specialist lenders and brands in Australia who will accept borrowers with paid and unpaid defaults, discharged bankruptcy claims, mortgage arrears and a high number of credit enquiries on their credit files. The products offered by these lenders are known as non-conforming home loans and are very flexible with lending conditions, usually also being offered to self-employed borrowers.
Read through the guide below to find out about bad credit and how it can affect your home loan chances.
How to get your bad credit home loan application considered by a lender
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1. What is bad credit?
Bad credit occurs when you get one or more negative listing on your credit file, or you have a low Equifax score. Depending on how many and the type of listing, it could decrease your chances of getting a loan with a typical lender dramatically. Below are some examples of what a bad credit file contains:
- Unpaid bills - One of the main ways that people will get a bad credit history will be because they have unpaid bills. Make sure you keep your payments up to date and on time and try to pay them back as soon as possible.
- Late payments - While late repayments will affect your credit history, they will not have as much as an effect as unpaid bills.
- Previous credit rejections - If you have recently been declined a home loan, credit card or personal loan then you may get a bad credit rating from this. Many lenders see rejections as a negative thing, as it could show you're careless about your credit file.
- Applying too often - Tying in with the point above, it is a general rule of thumb that you should only make an enquiry for credit once every six months. Any more than this could raise a red flag to lenders, as it could show that you're struggling financially and require credit.
- Bankruptcy - If you have declared bankrupt then you will have a bad credit rating that will stay on your credit file from five to seven years. Even if you've been discharged, your name stays on a Solvency Index. Lenders can access this Index at anytime.
There are several non-conforming lenders within Australia that will happily consider a home loan application from someone with bad credit. These include:
3. Am I eligible for a bad credit home loan?
All is not lost as there are credit impaired home loans are available for purchases if you can meet one or more of the following criteria:
- You are not currently bankrupt or in a Part 9 (IX) creditor agreement within the Bankruptcy Act. You can apply for a home loan with Pepper one day after being discharged. You'll need to wait two years for other lenders.
- You can put together a minimum deposit of at least 10% (or have enough equity in the property you want to refinance). Non-conforming home loans will usually lend out a maximum of 80% - 90% of the property value but any First Home Owner Grant (FHOG) you may be eligible to receive can be included as part of your deposit.
- You will be required to find money to pay any stamp duty and other costs outside of the loan allocation funds.
- You will need to prove you have a sufficient, ongoing income to service the loan repayments. Usually people rely on just pensions or those who are unemployed can not obtain a non-conforming home loan.
- Any outstanding debts, whether in default or otherwise must usually be declared and fully consolidated into your new mortgage and be fully paid out on settlement. Even taking into account of the consolidation of all outstanding debts your new home loan can still not exceed the LVR as set out by the lender.
4. Can I qualify for a bad credit loan if I'm a first home buyer?
You can still apply for a bad credit home loan if this is the first home loan you're applying for and you have the deposit ready. The same tips and information on this page applies to first home buyers, as applying for your first home loan as opposed to your second or third makes no difference to your eligibility all things being equal.
Keep in mind that if you're applying for your first home loan you should still be careful of your income and your deposit size. This is because unlike a buyer with a proven track record of paying off a home loan, you might not have an extensive credit history your lender can look for, so the other aspects of your application will come under more scrutiny.Here's how to navigate your way into the home loan space so you know which direction to take.
One of the main factors that will determine whether you will be accepted will be your income and the nature of your bad credit. Typically, if your bad credit was triggered by a life event then lenders tend to be more understanding. However, if you were aware of your bad credit but continually and knowingly made it worse, then lenders may be more sceptical. Regardless, researching about your options, attempting to fix up your credit and choosing a specialist lender to go with should help you get back on track. Research what options you have:
- Opt for a specialist lender - There are number of lenders who specialise in dealing with borrowers who have bad credit. These lenders will normally have a criteria in place, such as a deposit of at least 10%, not currently in mortgage arrears and not currently bankrupt.
- Speak to a mortgage broker - A mortgage broker could have access to a few bad credit home loans in their database, so it's worth calling up and asking what your options are.
Develop a plan to get your credit file back on track:
- Saving up for a deposit - Getting back on track is the first step to saving up a significant deposit. This could include finding employment and gradually saving up the amount you need.
- Credit repair - While bigger impairments such as bankruptcy are hard to repair, the smaller impairments such a late repayments, inquiries and defaults can be paid back and removed from your file.
6. What tips are there for applying for a home loan with bad credit?
- Get expert advice or financial counselling - If you can afford the services of a financial planner, it might be a good idea to talk about the best strategy in repairing your credit. Alternatively, the Australian Government provides a free financial counselling hotline to offer general advice.
Free Financial CounsellingIf you would like free financial counselling you can call the Financial Counsellors hotl
- Have a budget to show a savings history and get rid of existing debts - When you have a budget you can show your lender exactly where your money is going and how much is being saved. You will be able to see whether there really is room in your budget for a mortgage repayment each month and you will have a plan to manage your home loan and other expenses. Also consider reducing or paying down any credit cards if you have any.
- See where you currently stand - Obtain a copy of your credit report to find out exactly what you're dealing with. Having a copy of your credit report before you meet with a bank or mortgage broker to apply for a home loan can also help you uncover whether there have been any mistakes on your credit report which have led to you having bad credit. These can be listings such as a bill being declared overdue when you have actually paid it, or someone fraudulently using your credit card details. In these cases bad credit can often be fixed.
- Be honest if you have bad credit - If you are honest about the fact that you have a less than perfect credit history, your mortgage broker or lender can more easily find a way around the issue, rather than finding out too late that there is a better type of loan could be applying for to ensure success.
- Provide accurate information in your application - Your lender will ask you about your income, your expenses, your assets and your liabilities so make a list using your budget to provide accurate figures for each aspect of your finances.
Applying for a home loan if you have bad credit is about more than just applying and hoping you are accepted. You also need to make sure that your home loan will help you manage your finances responsibly in the future, and not be tempted into making your bad credit history even worse. If you have a bad credit history consider avoiding features which may tempt you into spending more than you can afford, such as:
- Line of credit. A line of credit allows you to access the equity in your home up to a value decided on by your lender. Often you don't need to make repayments until you have reached the limit of your line of credit, and while a line of credit has a lower interest rate than most credit cards or personal loans, it requires significant discipline to not spend more than you can afford to repay.
- Redraw facility. Making additional repayments to your home loan is one of the most financially responsible things you can do, so make sure you look for a home loan which allows you to make additional repayments without attracting a fee. At the same time having a redraw facility on your loan can make it very easy to access those funds again, undoing all of your hard work.
Your credit file includes information pertaining to when you made the application, what type of credit you applied for, how much you requested, as well as other information regarding your repayments. For example, if you have ever filed for bankruptcy or have defaulted on a loan or had a court judgement against you, this information, including pertinent details, will be found in your credit history file.
9. Are there any risks with a bad credit lender?
Just because certain lenders specialise in loans for people with a poor credit history, it doesn't mean that obtaining such a loan is easy or that bad credit home loans offer guaranteed approval. Since these types of loans are riskier for lenders, they tend to be extremely stringent, demanding higher interest rates and fees to cover themselves in case the applicant defaults on the loan. The thought pattern behind this is that the applicant has a bad credit rating for a reason and even if they have changed their ways, there's no guarantee that he or she won't default on the loan at a later date.
Additionally, with the new credit reporting code introduced in 2013, as well as the National Consumer Credit Protection Act (2009) and reforms to the Privacy Act 1988, lenders have to be even more careful to ensure they don't end up on the wrong end of the stick. This is because the legislation obligates lenders to only recommend financial products to their customers that they can easily repay without suffering any financial difficulty in the process.
If the lender approves a customer for a loan and the person cannot make their repayments and subsequently demands an investigation, the lender can end up losing their money if the independent investigator finds the customer to be in the right. That is, that the lender recommended a loan deemed to be unsuitable for the borrower's circumstances.
10. What do lenders assess in terms of credit history?
When a lender conducts a credit history check, they look at a number of factors which are then used to determine whether the applicant poses too much of a risk for them to approve their loan.
Credit application frequency
One thing all lenders analyse when assessing your credit rating is how often you apply for credit. The higher the number of applications registered in your credit history file and the more frequent they are, the less chance you will have of getting a loan. Of course, they will first ask you if there was a good reason for the frequency of the applications. Also, a lender could reject the application if there are a lot of credit applications on file but the borrower claims to have only a few debts. This is because the lender could simply believe that the applicant is being untruthful about their existing loans.
Type of credit applied for
The type of loans you applied for will also be important to a lender analysing your credit history. For example, someone who has applied for a large number of credit cards may be declined immediately because it leads the lender to believe that such an applicant is too reliant on credit. On the other hand, someone who has a large number of applications for home loans is understandable because they could simply be looking to find the cheapest offer.
Defaults, bankruptcies and other red flags
As with every lender, a non-conforming lender will look at all the red flags in your credit history. However, they will also demand 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 and this may lead to your application being declined on the grounds that you were not being transparent enough or fully honest about your circumstances.
Peter and Mary apply for a bad credit home loan
Peter and Mary had been paying their home off for the past 20 years. Unfortunately, Peter fell ill and had to take four months off work. For the first two months they were able to cover the home loan repayments on the amount in their redraw account and Mary's wage covering day to day expenses.
It was after this two months that the couple started to struggle, having already taken a repayment holiday, bills were piling up and the home loan repayment was deemed more important. Numerous letters from the lender sat on the kitchen table. Peter and Mary eventually fell into arrears on their current mortgage.
A few months later, Peter was able to go back to work again and their finances started getting back on track. They wanted to refinance their home loan to extend it to 25 years instead so they could get back on track with smaller repayments. Since they already had a black mark with their current lender, they refused their application to refinance.
Peter and Mary did a significant amount of research online and decided to apply for a refinance with Pepper home loan. They already had the deposit ready from the equity they had built in their property. Pepper were happy to see that Peter was back in employment and offered them a loan.
You might still be able to get a home loan if you have paid defaults on your credit file. These will appear on your credit history and your success will depend on the lender's policy.
12. My partner or spouse has bad credit, does that affect me?
If you decide to apply as a joint application for your home loan, your lender will take into account your partner or spouse's bad credit history. While your good credit history may offset some of that, the banks will make an assessment based on the whole and will let you know of the outcome. If you're declined by a typical lender, then you may need to speak to a bad credit specialist lender.
13. I'm currently on the pension, am I eligible for a bad credit home loan?
While lenders tend to accept pension payments as a source of income, you tend to need another source of income to be able to service a home loan. This is because a home loan is such a big amount, that Centrelink payments alone, won't be able to make to make the repayments. Other income sources include employment and assets that generate cash flow.
14. Do you qualify for a bad credit home loan?
The answer to this question will depend on the loan you apply for. Some lenders will clearly state which loans cater to which types of bad credit. Generally speaking, there are loans offered to most types of bad credit applicants, with the worst cases receiving higher interest rates.
15. Are there different types of defaults?
Defaulting on a utility bill and defaulting on a home loan payment are different things. Missing your utility bill payment will be listed as an unpaid default on your credit rating. By comparison, being 'in default' on your home loan means you have unpaid arrears outstanding on your account that need to be paid.
If you are in default on your home loan, chances are the amounts you owe are much higher than just the missed payment amounts. This is because your lender is likely to charge you overdue fees or missed payment fees, along with default penalty interest rates on top of your regular interest charges.
16. What are some of the documents that I would need to provide?
- PAYG - Typically last two pay slips with a letter confirming employment, latest group certificate, tax assessment notice of three months bank statements.
- Self employed - Last two years of tax returns plus tax assessment notices.
Low or alternate documentation
- ABN registered for 24 months though some lenders have a 12 month minimum
- Declaration of financial position, including business bank statements, business activity statements and accountant's confirmation
17. Are there banks that overlook defaults on bad credit?
Yes, there are a number of non-conforming lenders within Australia that may accept bad credit histories. Aside from this, many of the big banks may overlook a small default if your application is particularly strong.
Your credit fileIf you do have defaults listed on your credit report, there are some things you can do to improve your chances of being approved for a home loan. Here are some simple steps to take:
- Write a letter for your default explaining how it occurred
- Provide evidence to verify your explanation
- Pay off any unpaid defaults and ask the credit provider to change your listing to a paid default instead of an unpaid default
- Save as much money as you can. A larger deposit will go in your favour
- Search for a lender that is more likely to approve your application, despite your defaults
- Get into the housing market sooner. One of the biggest advantages of obtaining a home loan through a bad credit lender is that you get to enter the housing market now instead of waiting until later. This gives you the ability to start proving to your lender that you are capable of keeping up with your financial obligations and making your payments on time.
- Can refinance to a regular home loan later. If you can manage to improve the value of the property you bought or pay down your home loan balance enough, you also have the opportunity to refinance your bad credit home loan over to a mainstream lender. This could mean slightly lower interest rates after you've proven that your bad credit rating was a temporary downfall in your past that you've since amended.
- Higher interest rate. Perhaps the biggest disadvantage to a bad credit home loan is that the interest rate is often higher than what is available from the big banks. This is because non-conforming lenders adopt a 'rate for risk' policy. As their risk increases, so too does your interest rate.
- Higher repayments. Due to the higher interest rate, this will also mean you could end up making higher repayments each month. If you are able to make your repayments on time, many non-conforming lenders may consider reducing your rate.