What exactly is bad credit?
When someone has “bad credit”, it means they haven’t kept up with their credit obligations. They may have missed loan repayments, failed to pay off credit cards, not paid their rent on time (if at all!), or had a vehicle repossessed, for example.
A bad credit score, based on your credit history, may therefore 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.
Understanding bad credit history
It helps to be aware of your credit situation. You can get a credit check from the Australian Government, which contains your personal details including your name, gender and address. The file also contains previous home addresses and your employment history, as well as a record of every loan enquiry you’ve made in the past five years.
Whenever you apply for a loan, you generate a new enquiry. You may even generate one if you ask about home loan rates without applying – however, you can rest assured that asking uno about rates won’t show up 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.
Should I be worried?
In some circumstances, your credit report generates what’s known as a black mark. Usually it’s because you’ve missed a payment on your mortgage or have credit card debt. These black marks ultimately factor into banks and lenders’ decisions about whether to give you a loan. Too many black marks lead to a refusal.
In a nutshell, lenders don’t like bad credit. A black mark on your credit file can indicate that you aren’t reliable and are therefore at risk of not paying back your loan.
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. 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 a 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 much debt for your current income to sustain could stop a home loan in its tracks, particularly if a lender considers you insolvent.
Each black mark pulls you closer to having bad credit.
Am I at risk of bad credit?
It may surprise you to hear that bad credit affects more than the irresponsible. A number of 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.
Bad credit can affect affluent people. This is because such people often have larger mortgages, sometimes 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.
Be aware of financial stress
According to the Australian Bureau of Statistics’ 2015-16 Household Expenditure Survey, a household can be said to be in financial stress if they experience four or more indicators of financial stress within a 12 month period.
There are two types of financial stress indicators: financial stress experiences and missing out experiences.
Financial stress experiences
- Unable to raise $2000 in a week for something important
- Spend more money than received
- Could not pay gas, electricity or telephone bill on time
- Could not pay registration or insurance on time
- Pawned or sold something
- Went without meals
- Unable to heat home
- Sought assistance from welfare/community organisations
- Sought financial help from friends or family
Missing out experiences
- Could not afford a holiday for at least one week a year
- Could not afford a night out once a fortnight
- Could not afford friends of family over for a meal once a month
- Could not afford a special meal once a week
- Could only afford second hand clothes most of the time
- Could not afford leisure or hobby activities
In 2015-16, 15% of Australian households (approximately 1.3 million people) met this criterion for financial stress. As in previous years, the most commonly reported indicators of financial stress were the inability to afford a holiday for at least one week a year (23%), followed by an inability to afford a night out once a fortnight (17%).
Households in financial stress tended to be lone person households (28%) or couple families with dependent children (26%).
If any of these stresses affects you, or you’re worried about your financial situation, it’s a good idea to talk to a financial adviser about your options.
Can I get a home loan with bad credit?
Despite the risk, in some circumstances lenders will issue home loans to someone 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.
Specialist lenders do this to offer people the chance to get back on their feet after a rough patch. Bad credit borrowers will often face higher interest rates, however. As a general rule, the higher the risk attached to the borrower, the higher the interest rate of a bad credit loan. You may also have to pay Lender’s Mortgage Insurance (LMI).
With good financial management, a borrower can clear up his or her credit file and gain access to better rates and loans.
As an online mortgage broker, uno works with several lenders who focus on helping those with bad credit. Speak to a uno adviser about your situation.
Bad credit loans by type:
There are five types of bad credit home loans you can access, although it’s a good idea to speak to an expert about your options before applying for any of these:
- 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 totalling more than $150, for 60 days past its due date. Defaults usually prompt lenders to decline the loan, because it says to them you cannot pay your debts.
- Discharged part IX debt agreements loans
You might be able to access a Part IX (9) debt agreement loan if you have entered and discharged a debt agreement, known as a Part IX, which is a legally binding agreement between you and your creditors. A debt agreement may be a suitable alternative to bankruptcy. Speak to a uno adviser about which lenders offer part 9 debt agreements and the best rates on offer at the moment.
- Discharge bankruptcy loans
Bankruptcy tends to lead to 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 – although this still indicates 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. Although this creates a larger mortgage payment, it can make your debts easier to manage and is likely to reduce the total interest payable on things like credit cards.
- 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 repayment amounts.
Where to from here?
Bad credit home loans are a short-term solution 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 debt and improving 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.
What other options do I have?
A uno home loan adviser can help you figure out how 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.
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 mortgage.
With Hannah Tattersall