Your credit score is an important number used by lenders to determine your creditworthiness before agreeing to lend you money. A good credit score is considered an indicator of good financial behaviour, making it easier for you to qualify for a credit product, such as a home loan. On the other hand, a low or bad credit score could make it challenging to get approved for a home loan.

Unfortunately, most lenders consider borrowers with a low score or bad credit as risky business and avoid working with them. But that doesn’t mean you can’t get a home loan with bad credit, even though it’s going to be challenging.

How to get a home loan with bad credit

It’s not impossible to get approved for a home loan with bad credit, but it will depend on several other aspects of your application. Lenders are required by law to lend money responsibly. They cannot offer you a loan they think you can’t service. To ascertain whether you can repay a loan comfortably, lenders look at several things, such as your credit report, income, expenditure, and existing debts.

If you’ve defaulted on a loan or regularly miss your repayments, a lender will know about it when they look at your credit report. Based on what they see, they may conclude that you’re struggling with money and can’t afford a loan, leading them to reject your mortgage application. However, lenders don’t treat all defaults in the same manner.

If the default is for a small amount, or it was made several years ago, and you’ve demonstrated good financial behaviour ever since some lenders may agree to lend you money if you earn enough to service the loan. 

You could even consider applying for a bad credit home loan with a specialist lender if your credit score is less than perfect. However, the interest rate charged on a bad credit home loan is generally higher than a traditional home loan.

What is a bad credit home loan?

A bad credit home loan is a type of mortgage loan that is offered to borrowers with a poor rating or no bad history. Such loans are offered by specialist or non-conforming lenders willing to work with individuals that don’t fit the standard borrower profile.

However, not every person with bad credit gets approved for a home loan. Even specialist lenders will verify your income and expenses to ensure you can afford the loan before approving your mortgage. Having a stable job and genuine savings can help you improve your application.

Furthermore, the lender would probably want to verify why your credit score is low. If you’ve struggled with finances in the past, the lender may want to know what led to those problems and how you have resolved them.

Is it a good idea to apply for a bad credit home loan?

If your credit score is less than perfect, a bad credit home loan could be one of your few choices to finance a home. However, there’s a catch. Even though a bad credit home loan could give you a chance to own your home, you’re likely to pay more interest charges to your lender than a traditional loan. 

It’s difficult to say whether applying for a bad credit home loan is a good idea. The right choice for you will depend on your personal goals and circumstances, but it’s important to understand the pros and cons to make an informed decision.

Bad credit home loans are typically more expensive than traditional loans to compensate the lender for their higher risk. Therefore, it’s important to research your options and calculate the total cost of the loan to you before making a decision.

Owing to their higher costs, bad credit loans may not be suitable in the long run. However, it’s possible to refinance to a standard home loan once your situation has improved to save money on your mortgage.

You should also be prepared for future rate hikes to avoid defaulting on your home loan. Calculating your monthly repayments at a higher interest rate than advertised could help you determine whether you’ll be able to service the loan if the interest rates were to rise by a few percentage points. 

If you’re planning to apply for a home loan, you may want to check your credit score to determine how lenders see you. If your score is low, you could speak with a mortgage broker to learn more about your options or ask a Hashching expert for their opinion.

By Vidhu Bajaj,
Hashching Content Writer