Getting a Home Loan with Bad Credit

Bad credit can happen to anyone. Even affluent people can be affected by bad credit scores. Here’s how bad credit scores work, and how your score can affect your property purchase.

| | 11 minute read

There’s Still Hope If You Have Bad Credit

A bad credit rating may prevent you from securing a home loan. Each black mark on your credit report increases the chances that a lender will say “no”.

Many people aren’t aware they have bad credit until they are refused a loan. Here we’ll look at some of the issues surrounding bad credit and what you can do about them.

Basic Credit Report Information

On the basic level, your credit report contains your personal details. These include your name, gender, and address. The file also notes previous addresses and your employment history.

The report also contains a record of every loan enquiry you have made in the last five years. You generate a new enquiry whenever you apply for a loan. You may even generate one if you ask about home loan rates without applying. (Note, if you make an enquiry through uno it does not show on your credit report).

Legal issues are also recorded. In particular, the file contains information about court judgements and writs. Bankruptcies and Part 9 agreements also get noted.

What Are Black Marks?

Your credit report generates a black mark in several circumstances. Usually, it is because you have missed a payment, often on a mortgage or credit card debt. These black marks factor into a lender’s decision about whether to give you a loan. Too many black marks lead to a refusal. There are several types of bad credit, including:

Poor Credit History: Defaults and bankruptcies leave big black marks on your report. Making too many loan applications can also damage the report.

Mortgage Arrears: Every missed home loan payment counts against you. If you have missed several in six months most lenders won’t offer you a loan. Even one missed payment can lead to refusal for refinancing.

Unpaid Bills: Overdue bills will show up in the documents you give to lenders. They are another indicator that you may not pay back a loan.

Your History with The Lender: A poor history with the lender you apply to is a major black mark. Most don’t forget previous issues easily.

Too Much Debt: Having too many debts for your current income to sustain could stop a home loan in its tracks. Some lenders may see you as being insolvent.

Business Issues: Company directors may find their business issues can affect their personal finances.

Each black mark pulls you closer to having bad credit.

Who Does Bad Credit Affect?

It may surprise you to find out that bad credit affects more than the irresponsible. Circumstances can lead to people entering bad credit. For example, a divorce or an injury can often create black marks on a credit report. It only takes a couple of missed payments to make lenders wary. Even mistakes get recorded, though you can have these erased.

In fact, bad credit sometimes affects affluent people. This is because such people often have larger mortgages with high Loan to Value Ratios (LVRs). Couple this with the fact that wage rises have not matched the property market and you will see how easy it is to fall into bad credit.

The 2014 introduction of the Comprehensive Credit Reporting (CCR) may help. The CCR offers more transparency in your credit report and makes it easier to remove mistakes. Even then, people with clear credit records and unsound payment histories may find themselves in trouble.

What Causes Bad Credit Situations?

The Australian Bureau of Statistics (ABS) has noted that there are several symptoms that lead to bad credit situations. It classes each as a financial stress. The more of these stresses you have, the more likely it is that you may have a black mark on your credit report.

The stresses include the following:
• Spending more than you earn.
• Not being able to raise $2,000 in one week.
• An inability to pay utility bills.
• Selling and pawning valuables to afford essentials.
• Skipping meals.
• Overdue insurance and registration payments.
• Looking for financial help from family, friends, or organisations.

These stresses are most common in young homes. Seven in 10 households classed as young have felt one of these stresses in the last year.

If any of these stresses affect you, talk to an expert. You may struggle to get even a basic home loan with too many of these stresses.

Why Do Banks Refuse Those With Bad Credit?

Lenders don’t like bad credit. A black mark on your credit file can indicate you aren’t reliable. Too many, and the lender will steer clear of you. Major lenders and banks, in particular, won’t usually offer home loans to people with bad credit.

Can I Get A Home Loan With Bad Credit?

You can get a home loan with bad credit in some circumstances. Australia has several lenders who focus on helping those with bad credit.

Such lenders examine situations that would lead to a traditional lender refusing a loan. In many cases, those with black marks can secure special mortgages using these non-traditional lenders.

Specialist lenders tend to look at borrowers individually instead of using automated systems. They will listen to what you have to say and assess you based on your story. Also, such lenders can help you achieve fast approval for a specialty home loan.

How Does It All Work?

Specialist lenders aim to offer people the chance to get back on their feet after rough patches. Many bad credit borrowers will not default again once they have cleared their credit reports. This offers more incentive to lenders. After all, a borrower who has learned a lesson and improved is a reliable borrower. This is why specialist lenders offer more leeway than major lenders and banks.

Still, bad credit borrowers will often face higher interest rates. As a general rule, the higher the risk attached to the borrower, the higher the interest rate of a bad credit loan. Those with lots of black marks tend to pay the highest interest rates.

Beyond that, the amount of the loan can affect the interest rate. Those borrowing less than 80% often get lower interest rates than those borrowing over 80%.

These rates are the trade-off for accessing a bad credit home loan. With good financial management, the borrower can clear up his or her credit file. Once that is done, they gain access to better rates and loans.

The Types of Bad Credit Loans

There are five types of bad credit home loan that you could access. Always talk to an adviser before applying for one of these home loans.

Default Home Loans
Some lenders will look at both the paid and unpaid defaults on your credit report. A default is generated if you fail to pay a bill over $150 for 60 days past its due date.
Defaults usually lead to normal lenders and banks declining the loan. This is because they show you cannot pay your debts.
A default home loan takes the status of your defaults into account. You improve your chances of getting this type of loan if you have more paid defaults than unpaid.

Discharged Part 9 Debt Agreements Loans
You could access this type of loan if you have entered and discharged a Part 9 agreement. Such agreements are held between borrowers and their creditors. They act as plans to help those in debt make payments without getting themselves into trouble.
Part 9 agreements stay on your credit report for seven years. Even if you fulfil the agreement and discharge it, it stays on your report.
This would normally cause a bank to reject you. However, some lenders will offer home loans to those with discharged Part 9 agreements.

Discharge Bankruptcy Loans
Bankruptcy will usually lead to all lenders refusing your home loan application. You exit bankruptcy when you meet the discharged condition. This is also the point when you can start applying for credit again.
Many lenders are wary of those who have been recently discharged from bankruptcy. Despite this, some exist who will consider a home loan the day after you are discharged.

Debt Consolidation Loans
You consolidate your debts when you take multiple small debts and combine them into one larger debt. Doing so can help you avoid bad credit but it still indicates some unreliability.
Despite this, there are some lenders who will help you with debt consolidation. In some cases, you can consolidate your debts into an existing mortgage. This creates a larger mortgage payment but it makes your debts easier to manage.

Tax Debt Loans
A tax debt loan involves combining the debt you owe to the Australian Taxation Office (ATO) into your home loan. ATO debt can occur from a simple mistake on your tax form. It’s surprisingly common. Taking this type of loan erases the ATO debt, though it may increase your mortgage payments.

How Can I Get Approved for a Bad Credit Loan?

Though all cases are considered, you have a higher chance of getting a bad credit loan if you meet these criteria:

• You have paid defaults on your credit file. How much you can borrow depends on the size and origin of the default. A paid $500 default won’t prevent you from getting a 90% home loan, in most cases. Larger defaults may lower that percentage.
However, some speciality lenders can offer loans up to 90% on paid defaults as large as $500,000. It depends on the lender and your current situation. Having a guarantor on the loan helps you secure a higher percentage.
• Some lenders will consider those with unpaid defaults. Most will ask that you clear the default before the loan goes through. Assuming you do, you gain access to the sorts of loans detailed in the above point.
• Court writs and judgements won’t prevent you from accessing some home loans. A specialist lender could offer up to 90% of the value of the home. This tends to depend on the writs and judgements on your record.
• Most lenders won’t offer loans to those currently in bankruptcy or taking part in a Part 9 agreement. However, some speciality lenders will consider you as soon as you are discharged.

Should I Get A Bad Credit Home Loan?

Whether you get a bad credit home loan depends on your circumstances. They are short-term solutions to debt issues and often come with high interest rates.

On a general level, those considering selling their homes to cover their debts may benefit from bad credit home loans. Instead of potentially losing money on a sale, the borrower can work on clearing their credit report.

Many specialty lenders offer bad credit loans that help borrowers clear black marks from their reports within three years. After that, the loan reverts back to a more traditional format.

People who want to keep their homes while making a fresh start might consider bad credit loans too. Instead of refinancing immediately, you can give yourself some space to clear your credit report. A better credit report tends to mean a better refinancing deal.

Please note that this is general advice. You should always talk to an adviser about your situation before making any decisions about bad credit home loans.

How Do I Move Forward?

If you think a bad credit loan may be right for you, your first step it to talk to a specialist. A uno home loan adviser can help you figure out what you need to do to set your credit report straight. They can offer advice specific to your situation and help you create a plan.

Avoiding more black marks will often be part of that plan. After all, getting more black marks while you try to clear existing ones takes you back to square one.

These general tips should help you avoid landing in more credit trouble:
• Stay in touch with your lenders to ensure you don’t miss important information.
• Keep making your payments on time.
• Clear all of your current defaults.
• Avoid situations where you pay $0 on a debt.

You may also consider delaying your search for a home until you clear your credit report. This is not always the right choice. You may find buying early can help you build equity. This positively affects your credit report.

Again, please note that the information above is general in nature. You should always consult with a professional, such as a financial planner or a home loan adviser, before pursuing a bad credit home loan.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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