A less-than-stellar credit history always gets a bad rep when applying for a home loan, as anyone who has ever looked at venturing into the real estate market can tell you, but a lousy credit rating – even a bankruptcy – does not always disqualify you for a mortgage. What it does mean is that a borrower will have to make some prudent financial adjustments, deal with stricter loan terms and conditions, and potentially shell out a little more money due to higher interest rates and fees imposed on them.
First thing's first, let's discuss what happens during bankruptcy, and what exactly this means for your mortgage prospects.
What happens during bankruptcy?
When someone files for bankruptcy, he or she is identified as an 'undischarged bankrupt', which means they still in the process of insolvency, a period that usually lasts for at least three years, depending on the circumstances.
During this period, they are only allowed to own limited assets, cannot travel abroad and cannot avail themselves of credit products.
The Australian Financial Security Authority (AFSA) will nominate a trustee that will look over the individual's financial affairs until this period ends or until the trustee deems the person capable of handling their own money. After that they are released from the financial trough, and are now known as a 'discharged bankrupt', which lifts the restrictions on your finances.
At this point, the bankruptcy will be recorded on your credit report for seven years, which can derail your chances of owning certain assets and applying for various loans, among other things. You will also be permanently listed on the National Personal Insolvency Index (NPII).
Here's are some key steps to take when you apply for a home loan after bankruptcy:
1. Wait for at least two years to apply for a home loan
It is advisable to wait for at least two years after being released from bankruptcy. Borrowers can use that waiting period to building up good credit by paying their bills on time and having a stable employment as proof to lenders that you are in a more stable situation.
2. Look for a specialist mortgage lender with a good track record and reputation
While some lenders will be more guarded about lending to people with less-than-perfect credit history, there are specialists with a client focus on discharged bankrupts and people with other similar conditions.
They usually have stricter eligibility requirements and loan terms and conditions, as precautions regarding the borrower's bad credit history, but nevertheless, they are usually more willing to take them on as clients.
Be sure to do research on the lender's reputation as well, as there are some unscrupulous folks out there who will try and take advantage of your situation by overcharging you.
3. Choose a home loan that's applicable to your current financial situation
Even though most of the home loans available for an average borrower cannot be enjoyed by discharged bankrupts, these three types of home loans are generally the ones they can choose from:
Basic home loans: No matter if you chose one with a fixed or variable interest rate, a basic loan can be a good choice for those trying to re-enter the market. The only catch is the extra add-ons that an average borrower can avail such as pre-purchase approval is out of the equation.
Low doc loans: An ideal home loan type for discharged bankrupts with less financial documentation to present. A declaration of your annual income will suffice, however you will be subjected to pay for a higher interest rate.
Package home loans: This type of loan can save you some money in the long run as lenders will only charge you a single annual fee instead of multiple ones by sandwiching your loan to other products such as insurance, credit cards or other loans.
4. Save up for the deposit (which may be higher than the standard 20%)
Discharged bankrupts are seen as a high risk, so lenders will require them to pay more upfront, as a way to compensate for the risk they are taking. Having more than 20% of the price available for a deposit is also a great way to help convince lenders that you are responsible with your money and likely to pay the loan back in full.
It is also recommended that you set aside even more money, if possible, to take account for additional fees and costs that may pile up.
5. Resist the temptation to apply for several loans.
Remember, every loan application is etched to your credit history. Multiple applications in a short period can leave a bad impression with the professionals who will be reviewing your financial background – after all, if you make multiple applications in a brief span of time, you have by definition been rejected by a few lenders already.
It may be inevitable that lenders may reject your application based on your insolvency past. If you have been denied for a loan, wait for a while before trying your luck to other institutions. Even if you get discouraged, don't fret. It may just be that you have not found the right lender suitable for you.