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If you have a less than perfect financial history, it doesn’t necessarily mean you will not be able to get approved for a home loan.

There are a number of home loan options for borrowers with bad credit, but there are important factors to be aware of.

What can lead to bad credit?

A bad credit history can make applying for a home loan more difficult, but what exactly is bad credit?

  • Credit report defaults

    A default is a debt that is overdue that has been listed on your credit file by the business you owe the money to. It has to be more than 60 days overdue and more than $150. The listing is updated when it is paid to record the payment date but the listing can remain on the file for up to 7 years.

  • Multiple credit enquiries

    When you apply for credit or a contract with a utility company, they may check your credit file. Each time this is done the details of the company are recorded along with the loan amount or credit limit you were applying for. It is only recorded as an enquiry without If you have applied for multiple loans or credit cards in the past, each of these applications will appear as enquiry on your credit report. Several enquiries could give lenders the wrong impression and since they are unable to see whether you were approved, declined or changed your mind, they may assume the worst.

  • Poor repayment history

    In March 2014, comprehensive credit reporting was introduced, which means that repayment history on loans and credit facilities can be listed on your credit file. It is reliant on lenders participating and providing this information so is happening gradually. If your lender contributes data, then your credit file will list your repayment history. It will show whether repayments over a two year period were made in full and on time. This information will be used by lenders to assess your credit worthiness.

  • Payment issues with specific providers

    Lenders keep a history of dealing you have with them. If organisations are connected, this information may be shared. When you apply for credit, if transactions in the past have not been up to scratch, then this may go against you when you apply. For example, having a savings account that is frequently overdrawn or a credit card that is consistently paid late or goes over the limit could impact your changes of having your home loan application approved years later, even if none of these have resulted in a negative listing on your credit file. If mortgage insurers have information from past applications you have made, like not disclosing all debts, they can also refuse to insure your loan.

Find out more about your comprehensive credit report here

  • Unexpected life events

    Circumstances can occur which can impact your ability to meet your repayments. This could include sudden illness impacting you or a close family member and you not being able to work, being made redundant or losing your job, relationship breakdown or divorce. While some of these events are not always in your control, if they affect your ability to meet repayments and stay financially stable, it could affect your credit history and these blemishes will remain on your record for many years.

Surprising cases that can lead to bad credit

Those with bad credit are often given the stereotype of having serious money issues such as multiple maxed out credit cards, gambling problems, bankruptcy and have little to no income.

But in most situations, this is not the case. Many average Australians with a regular income can often fall into bad credit without meaning too. One-off life events can cause serious strain on a person’s financial situation, even if they are in control of their finances at the time. Listed below are just some of the common bad credit cases lenders see.

Illness

Sarah and Matt are in their early 30’s and have started to save for their first home. Sarah become significantly ill and was unable to work for five months.

After two months, the couple began to struggle with meeting their regular bills and as a result, fell behind and received a couple of defaults on their credit report. As soon as they were able they paid the outstanding amounts and over time, Sarah was able to return to work.

Unfortunately years later these defaults had an impact on their application when it came time to apply for a home loan.

Relationship breakdown

When Lisa and her husband decided to get a divorce, they had a mortgage, car loan and credit repayments they met every month. However, during the divorce process, these repayments were not made.

Lisa assumed that the debts were frozen until all the financial negotiations were complete, whereas her husband thought she was making the repayments. Unfortunately, these multiple unpaid repayments mean it will appear on their credit report as a default.

Not having a credit rating

James is 20 years old, but has never taken out credit before. He does not have a car loan, credit card or personal loan and he thought that this would help him when it came time to apply for a home loan.

However, as James does not have a credit history, lenders were not able to see whether he could meet repayments or not and a result, was not able to be approved for the prime home loan products.

What is a bad credit home loan?

If you have a less than perfect credit history, you may be able to meet the requirements of lenders who specialise in loans which allow for credit history issues. These are different from those advertised by the big banks and mainstream lenders. Smaller lenders have filled this space in the market and provide a real alternative for people that don’t qualify for loans elsewhere. They assess these loans differently, are more interested in finding the positives in what occurred and are able to be more flexible when applying lending policies.

Some benefits of a bad credit home loan include:

  • The application can be more straightforward. You can explain your issues upfront and can work with the lender to provide the information needed to show you are a good risk.

  • You can buy your new home sooner instead of having to wait for your defaults to be erased from your credit report.

  • You can refinance to a mainstream loan once your finances are back on track. Then you can take advantage of a lower interest rate that may have more flexible features too.

Top tips for borrowers with bad credit

  • Get a copy of your credit report

    When was the last time you looked at your credit report? Some borrowers don’t regularly check their credit report, so they have no idea what is listed or if there are any mistakes. By checking your credit report, you can ensure that all listings are correct and resolve any incorrect information with the lender involved. It will also give you the full details of the credit listings which you will need when you chat to prospective lenders.

Do it yourself

You can get a copy of your credit report from Veda.

  • Get a copy of your credit report

    When was the last time you looked at your credit report? Some borrowers don’t regularly check their credit report, so they have no idea what is listed or if there are any mistakes. By checking your credit report, you can ensure that all listings are correct and resolve any incorrect information with the lender involved. It will also give you the full details of the credit listings which you will need when you chat to prospective lenders.

  • Review your finances

    It is often the small, simple changes that have a great effect on your home loan application. You will need to review all of your financial commitments to see how you can manage them better. It may mean that you will have to get rid of certain expenses such as Foxtel, overseas holidays or your gym membership in order to lighten the financial load.

  • Reduce debt as much as possible

    Having lots of credit cards and personal loans with not a lot of assets to show for them can paint a poor picture of your finances. Make it a priority to pay these off as quickly as possible. Not only will it be easier to remember to pay all your monthly repayments but it will free up cash to save a bigger deposit. Lenders like seeing evidence of a solid savings pattern.

    If you are able to demonstrate that you have improved your financial situation, it will help strengthen your application. Lenders understand that there are certain events that can cause financial strife, but you need to be able to show that you are back on track and will be able to handle mortgage repayments.

  • Don’t apply with multiple lenders

    You may think that applying for a home loan with multiple lenders will give you a better chance of securing a home loan, but it will most likely have the opposite effect.

    Each time you submit a loan or credit application to a lender, it will be noted as an enquiry on your credit report. Lenders don’t know if this enquiry resulted in you taking out the loan, changing your mind or being declined. Lots of credit enquiries could be an indication that you are in financial trouble and result in the lender being more cautious about your application.

    This doesn't mean that you cannot enquire about home loans with different lenders, just be sure that you only hand in a formal application if you intend to go with that lender.

  • Full disclosure

    Being open and honest about your financial situation will work to your advantage. Lenders need to be aware of all expenses, income, assets as well as any defaults. Trying to hide information will only hurt your application. If a lender uncovers information that you did not disclose, it could put you in a bad position.

  • See a specialised lender

    There are a number of lenders who are able to provide specialised loans for those with a bad credit history. As you may not fit the criteria of a mainstream home loan, they will find a solution that suits your own unique situation.

    A specialised lender deals with unique cases every day and will more likely be able to understand your situation and provide you with a competitive solution.

At State Custodians, we understand that people experience events in their life that can affect their financial situation. Our Lending Specialists are here to find solutions and advise you on own in-house home loans as well as from a broad range of lenders. Give us a call on 13 72 62 or leave your details here and they will contact you.