How Can I Secure Approval For A Home Loan Despite Bad Credit?
Choosing the right lender plays a pivotal role in obtaining approval for a home loan when dealing with bad credit. While prominent financial institutions and lenders tend to have stringent lending criteria, there are alternative and specialized lenders who adopt a more adaptable approach.
Our team consists of dedicated mortgage professionals specializing in bad-credit situations, boasting extensive years of expertise in this domain.
Several of our seasoned brokers possess firsthand experience working within the credit divisions of major banks, equipping them with the knowledge to construct a compelling case for securing home loans despite poor credit.
Feel free to reach out to us at (03) 6144 9669 or complete our complimentary online evaluation form to explore how we can assist you in attaining approval for a mortgage, even in the face of bad credit.
Understanding Bad Credit Home Loans
In Australia, bad credit home loans represent a category of mortgage options provided by non-conventional or specialized lenders.
These home loans tailored for individuals with imperfect credit histories take into account various circumstances, particularly those involving borrowers with imperfections on their credit reports.
Their purpose is to cater to and support unconventional loan applications that fall outside the conventional banking standards, offering a pathway to homeownership for those who might not meet traditional lender criteria.
Varieties Of Bad Credit Home Loans
- Home Loan With Defaults
- These are tailored for borrowers with defaults on their credit reports, with two primary categories:
- Paid defaults: Defaults that have been settled in full.
- Unpaid defaults: Defaults that remain unsettled.
- Defaults signify overdue accounts, such as unpaid personal loans, credit card bills, utility bills, or phone bills.
- A default is recorded if a payment is 60 days overdue or if the lender has difficulty contacting the borrower.
- Most major banks typically decline applications from individuals with defaults, as it indicates difficulty in meeting debt obligations.
- These are tailored for borrowers with defaults on their credit reports, with two primary categories:
- Discharged Bankruptcy Home Loan
- This type of bad credit home loan is available to individuals who have been declared bankrupt and have subsequently been discharged.
- In Australia, some lenders are willing to extend loans for property purchases immediately following a bankruptcy discharge.
- Discharge is an automatic legal process that absolves the individual from bankruptcy, allowing them to regain financial stability and apply for credit once more.
- Part IX Debt Agreement
- These home loans cater to borrowers who have previously entered into a Part IX Agreement and have successfully fulfilled the agreement.
- In Australia, individuals struggling to repay their debts can work with a debt agreement administrator to establish an agreement with their creditors or lenders.
- Upon completing the debt agreement, individuals are discharged from the arrangement.
- A Part IX Agreement may remain on one’s credit file for up to seven years, but some lenders will still consider mortgage applications in such cases.
- Tax Debt Home Loan
- These home loans are designed for borrowers burdened with substantial debts to the Australian Taxation Office (ATO).
- Generally, the ATO debt can be incorporated into the mortgage, relieving the borrower of their ATO obligations.
- Tax-related debt issues are relatively common and can stem from errors on tax returns.
- Debt Consolidation Home Loan
- These home loans are ideal for borrowers with multiple, unmanageable small debts.
- In Australia, individuals often choose to consolidate various forms of unsecured debt, such as personal loans, credit cards, and car loans, into their mortgage. This results in a single, more manageable monthly payment.
Why Consider A Bad Credit Home Loan?
Opting for a bad-credit home loan can offer several compelling reasons:
- Individual Assessment: These loans don’t automatically disqualify you based solely on your credit history. Lenders or mortgage brokers evaluate your unique circumstances and assess your application on its merits.
- Seizing Property Opportunities: You might be eyeing a specific property and don’t want to miss out while waiting for your credit score to improve. Bad-credit home loans provide a means to act on your property aspirations.
- Credit Rehabilitation: Making consistent, on-time repayments on your mortgage can contribute to rebuilding your credit score. Once you establish a solid repayment history with no arrears, you can explore opportunities to refinance into a more favorable interest rate.
- Dealing with Debts: These loans can provide the necessary breathing space to address and pay off existing bad debts, facilitating a journey toward a cleaner credit file.
It’s essential to acknowledge that bad-credit home loans typically carry higher interest rates, reflecting the increased lending risk. At Home Loan Experts, we view these loans as short- to medium-term solutions. We work with the intention of assisting clients in refinancing to a new lender within a few years, once their credit history has improved and cleared the way for more favorable terms.
Determining Your Borrowing Capacity With Bad Credit
The amount you can borrow when you have bad credit depends on the specifics of your credit file. Here’s a breakdown of the borrowing limits based on different credit situations:
- Small Paid Default: If you have a small default of less than $500 that was paid off more than six months ago, you can potentially borrow up to 90% or even up to 95% of the property’s value in strong cases.
- More Than One Small Paid Default: With less than $1,000 in paid defaults from financial institutions and less than $500 in paid defaults from non-financial institutions, you may qualify to borrow up to 85% or possibly 90% of the property value.
- Moderate Paid Defaults: If you have up to $3,000 in paid defaults, your borrowing options expand. You can borrow up to 80% of the property’s value with a prime lender, up to 90% with a specialist lender, or even up to 100% with the backing of a security guarantee from your parents.
- Large Paid Defaults: Larger paid defaults ranging from $3,000 to $500,000 are considered on a case-by-case basis. Approval depends on the strength of your explanation and the supporting evidence. Borrowing up to 90% of the property value can be an option with a specialist lender.
- Unpaid Defaults: If you have any unpaid defaults, your borrowing capacity is typically limited to a maximum of 90% of the property value with a non-conforming lender. Many lenders may require you to clear these defaults before approving the loan.
- Judgments or Court Writs: Having judgments or court writs can impact your borrowing capacity. You may be eligible to borrow up to 90% of the property value with a non-conforming lender. toward a cleaner credit file.
- Part IX Agreement and Bankruptcy: For more information on borrowing with a Part IX Agreement or after bankruptcy, refer to our dedicated pages on these topics.
If you have any further inquiries or need assistance, please don’t hesitate to contact us at (03) 6144 9669, complete our complimentary online assessment form, or leave your questions in the comments section below.
Qualifying For A Bad Credit Home Loan: Key Steps
If you have a tainted credit history, you can take several steps to increase your chances of qualifying for a home loan, even with major banks and lenders. Consulting with a specialist mortgage broker is paramount for constructing a compelling case that demonstrates your ability to manage a bad credit home loan effectively.
Working with a credit expert who understands what lenders seek in borrowers with past financial challenges is crucial. Here are the key steps to consider:
1. Avoid Accumulating More Negative Listings:
- Prevent any further bad credit listings. This can significantly enhance your prospects with specialist lenders who provide bad credit home loans.
- Show lenders that you are making a concerted effort to address your past financial difficulties and are in a better financial position.
- You can demonstrate this by making on-time repayments, maintaining contact with your lenders to avoid “clearout” listings, and making some payments on your existing debts.
- Efforts to pay off existing defaults can also be beneficial.
- Seek financial counseling if you are currently facing financial hardship.
2. Consider Waiting for Listings to Clear:
- If you have a history of missed payments or defaults, it might be advisable to wait for your credit history to clear before applying for a home loan.
- However, in some cases, waiting may not be in your best interest, as purchasing a home sooner can lead to property equity and improved financial standing.
- Consulting with a mortgage broker can help you determine the most suitable course of action based on the specific details of your credit file.
- If you have a listing that is about to be cleared in the near future, it may be prudent to revisit your home loan application after the listing is removed.
Please note that the information provided here is for general guidance, and specific circumstances may vary. It is essential to seek advice from a qualified mortgage broker who can provide tailored recommendations based on your unique financial situation.
Faqs About Bad Credit Home Loans
Specialist lenders, also known as non-conforming lenders, are far more flexible than major banks. These lenders recognise that people with bad credit are looking for a second chance at a happy life.
Your name, date of birth, current address, previous address, drivers licence number, employer and previous employer are information stored on your credit file.
All the loans that you have applied for in the last 5 years are a part of your credit file and they come up as “Enquiries”.
Before officially getting a blemish recorded on your credit file, there can be a definite lead up of events that can eventually result in defaults or worse.
The Household Expenditure Survey from the Australian Bureau of Statistics (ABS) found that the most common financial stress experiences included:
- Being unable to raise $2000 in a week for something important.
- Spending more money than received.
- Being unable to pay utility bills like gas, electricity or telephone on time.
- Being unable to pay registration or insurance on time.
- Pawning or sold something to make ends meet.
- Going without meals.
- Seeking assistance from welfare/community organisations.
- Seeking financial help from friends or family.
These financial stress indicators were most common with younger households, with 70% of respondents declaring that they had experienced at least one of the above scenarios in a 12-month period.
If you currently have a bad-credit home loan, you can refinance from a non-conforming lender when:
- You owe 80% or less of your property’s value
- Your defaults are no longer showing on your credit file
- You’ve paid off your defaults
- You have full income evidence
- You’ve made all of your repayments on time in the last six months.
Many Australians who fall into bad credit aren’t actually irresponsible or “bad people”.
Most of them have simply been involved in an unfortunate life event like divorce, loss of job, injury or business failure that has resulted in blemishes on their credit file.
People that fall into bad credit aren’t necessarily living in outer fringe suburbs either.
It’s well-known among economists that affluent suburbs are actually the most susceptible to financial stress when interest rates rise.
That’s because their mortgages tend to be much larger and they’re more highly-leveraged. That means their Loan to Value Ratios (LVRs) are higher.
Add to that the fact that wages haven’t really matched the growth in house prices and it’s easy to see how anyone can become “overexposed” and fall into a bad credit situation.
The worst part is that if you’ve missed just a couple of debt payments but have since been managing your financials positively, these listings still show up on your credit file sometimes years after you made the mistake.
Australians with bad credit can be declined for a home loan by major banks or lenders for a number of reasons.
It could be because of the type of bad credit you have or the size of your defaults but, generally speaking, simply having blemishes on your credit file can stop you from borrowing.
The reason is that it shows to the bank that you may be unreliable as a mortgage owner.
However, there are lenders that specialise in bad credit home loans and take a more common sense approach when assessing your situation.