Do you have bad credit on your file?
Something as small as missing an utility payment to declaring bankruptcy can mark your credit file for a long time to come. In fact, while bankruptcy proceedings usually last 3 years, bankruptcy stays on your credit file for 7 years and your name is permanently listed on the National Personal Insolvency Index (NPII).
Bad credit can keep you from your home buying dreams. But not so anymore. Several specialist lenders offer loans for people who are bankrupt, albeit at a higher interest rate. Nonetheless, bad credit loans provide you another chance to enter the property market as well as set your finances right.
Yes, you heard it right. It is commonly believed that discharged bankrupts cannot apply for a home loan. But that is simply a myth. Specialist lenders will lend up to 90-95% of the property price, even if you have been recently discharged from bankruptcy. However, home loan pre-approval for discharged bankrupts is conditional on certain circumstances and financial behaviour exhibited since discharge.
Do you know what happens when you go bankrupt?
On filing for bankruptcy under the Bankruptcy Act in Australia, a trustee is nominated by the Australian Financial Security Authority to manage your finances. The process usually lasts for 3 years and you are an undischarged bankrupt while the proceedings are on. A discharged bankrupt is a person who is no longer bankrupt.
Bankruptcy lasts for 3 years but it stays on your credit file for 7 years. This severely affects your borrowing capacity and discharged bankrupts often think they are locked out of the property market for good. However, this is far from the truth. By maintaining a strong financial position post discharge, it is possible to get loans up to 80% LVR and even more for funding your home.
What are my home loan options?
Discharged bankrupts can buy an established dwelling as residence and even invest in property, financed via 80% LVR loans available through various specialist lenders.
It is also possible to be approved for up to 90% LVR loans if you are ready to pay LMI waiver fee. LMI or Lenders Mortgage Insurance is not available for borrowers who have a history of bankruptcy, and approximately 2% of the borrowed amount must be paid as LMI waiver fee for a low deposit home loan. If you have saved up to 10 per cent (always prudent to save extra for accessory costs) of the property price, you can buy a home even as a discharged bankrupt.
Which lenders can I approach for my home loan?
Several non-conforming lenders offer discharged bankrupt loans that are pegged few points higher than the average interest rate in the market. However, it is important to know your lender well before signing the dotted line. Several unscrupulous lenders out there may charge you more than what you should be paying.
Discharged bankrupts can also borrow from one of the major banks if they can show proof of strong financial condition and good repayment history after discharge from bankruptcy.
Some tips before you start applying for a home loan:
1. You can apply for a home loan even within one day of discharge, but the longer you wait, the better.
2. Pay your bills on time, every time, to repair your credit. Lenders will take this as a sign of you being financially responsible, increasing your chances of approval.
3. Saving up to 20% deposit can help you negotiate a competitive interest rate on home loan with potential lenders. However, even if you cannot save an adequate deposit, you can still apply for a home loan on payment of LMI waiver fee.
4. Do not apply to many lenders simultaneously, especially if your loan application has been recently rejected. It is better to first check whether a potential lender offers bad credit loans. Also, it is advisable to check the reputation and track record of the lender before applying. Remember, every loan application you make, whether approved or not, shows in your credit file.
Life is all about second chances, and a bad credit home loan can provide you a chance to buy property once again. While the interest rates on bad credit loans may be higher than the market rate, it is possible to refinance to a better rate once you have built enough equity in your home. To understand your situation better, contact an expert online and instantly receive answers to all your home loan queries.
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By Vidhu Bajaj