Casey and her husband Hugh had never fallen behind their monthly payments until Hugh fell ill a few months back. Being a single income family with a toddler, they were able to manage for a couple of months with their emergency fund, but soon the emotional stress was intensified with financial troubles as bills began piling on the kitchen counter. There were a bunch of missed credit card payments and other bills before Hugh was better and resumed work, bringing things under control gradually. A year down the line, the couple decided to buy their first home. They had an adequate deposit and Hugh had a steady income to service the loan. But they were surprised to find their home loan application rejected!

Casey and Hugh are not alone. Many Australians run into bad credit without any fault on their part. Sometimes an illness, loss of job, divorce or bereavement of a loved one can lead to financial troubles and missed payments that stay as a black mark on your credit file for years to come.

However, at HashChing, we believe everyone deserves a second chance. Whether you have a low credit score, are a discharged bankrupt or a self-employed person struggling to finance your home, be comforted that there are specialist lenders who are willing to lend to you in your situation. If you have sufficient deposit and steady income to repay your loan, our mortgage experts can help you approach the right lenders, maximising your chances of approval.

 

What is bad credit?

In case you forgot to pay your credit card bill, failed to make your mortgage repayment or couldn’t pay your telephone bill on time, you’d be surprised to know that these slips are being recorded on your credit file and are going to stay there for the next five years.

Yes, unpaid taxes, outstanding bills, personal debts, insolvency, court orders, and too many enquiries on your credit file that may crop up when you are shopping around for a low interest rate home loan…all of these contribute to bad credit on your file that takes five to seven years to wipe off.

What this also means is that traditional lenders may not be willing to lend to you, considering your bad credit history. However, this does not mean you have to wait for five years to buy your dream home. If you think your finances are back on track and you are ready to purchase a home, a non-conforming loan or a bad credit home loan is a good place to start.

 

Bad credit home loans

When applying for a home loan, mortgage providers take into account two main criteria – income and credit history. If you have a large enough income to service your home loan, but a tarnished credit history is getting in your way, help is at hand with bad credit home loans that are offered by specialist lenders on a case-to-case basis.

Among others, these loans are available in cases of:

• Defaults on credit cards (paid or unpaid)
• For persons discharged from bankruptcy
• For persons who have completed a Part 9 Agreement (entered into with a creditor if a borrower is unable to pay her debt to rearrange the financial terms)
• For tax debtors (the specialist lenders will add up the pending tax payments into the mortgage so that you only have to make consolidated repayments)
• For people with small unmanageable credits (the specialist lender will roll these into a single mortgage product to avoid future defaults).

 

For home owners who have fallen into financial trouble, it often turns out to be cheaper to pay a higher interest rate than selling their house to buy another few years down the line. Refinancing to a bad credit home loan may allow you to keep your home and repay your debts until you can revert to a traditional lender once your credit file is clear. Ask a broker to understand your options better.

 

Bad Credit Home Loans come with the price tag of a higher interest rate in lieu of the greater risk that a lending institution is willing to take on you. It also helps to have at least 20% deposit (apart from an additional 5% for the accessory costs) to avoid the hassle of a second approval from a mortgage insurer since most lenders require Lenders Mortgage Insurance (LMI) for high LVR loans.

As a savvy borrower, you must understand that while bad credit home loans provide you a chance to start afresh, they must only be resorted to as a short-term strategy to repair your credit and get your finances back on track. Of course, once you have cleared your credit history, there is nothing stopping you from refinancing with traditional lenders at much lower interest rates.

 

How to improve your chances of approval 

Before you apply for a bad credit home loan, there are a few things you can do to increase your chances of approval:

Check your credit report – Pull out your credit report for free from a website such as Veda and go through it minutely. Dispute any discrepancies immediately to have them off your file and improve your credit history. Seeking help from a credit repair agency may help.

Build good credit – Put your troubled past behind and ensure you make every single payment on time to demonstrate your responsible financial behaviour. Proof of genuine savings (for up to 6 months) and a 20% deposit can go a long way to get your loan application over the line.

Apply to a specialist lender – Because mainstream lenders may not be willing to lend to you if you have bad credit on your file, it is even more important to approach the right lenders as rejected home loan applications will not make your credit file look any better.

Don’t apply to too many lenders – Your credit file includes all your past credit enquiries which means shopping around too much could also mar your credit report. Applying to too many lenders in a short span of time can be detrimental to your home loan application, which brings us to our final point of seeking professional help to apply for your home loan.

Use a mortgage broker – A mortgage broker is an expert who can assess your situation and tell you which lenders are more likely to finance your home. Currently, many lenders screen mortgage applications electronically, which means it is impossible to get beyond the machine to explain a genuine case of default to a person at the bank. Mortgage brokers can help you in this situation by sharing more information about your case with lenders, improving the chances of approval.

 

You’d be happy to know that Casey and Hugh recently moved into their own house. They had contacted us some time back, perplexed about their rejected home loan application. We asked them to get in touch with a credit repair agency and they were able to remove two of the five listings on it. Next, we sought pre-approval for the couple from a specialist lender who offered them a competitive home loan rate despite bad credit on their file as our experts informed them about Hugh’s illness that had led to financial difficulties for the otherwise responsible couple.

At HashChing, we have helped several clients with bad credit successfully secure financing for their home. If you find yourself in a similar situation, you don’t need to wait any longer to purchase your dream home. Contact a broker for all your home loan queries and also compare mortgage rates here for a low interest rate home loan.

 

By Vidhu Bajaj
HashChing Content Writer