Life can be unexpected. Even when you think you’ve got it all together, finances included, a roadblock reveals itself – and a few months on you realise you’ve unwarily missed a utility bill or credit card payment.
When applying for a home loan, lenders assess you not only on your current ability to repay the loan, but also on your credit rating – and if this doesn’t throw back a shining score when put through their computer system, then getting a loan can be difficult.
But, there are a number of ways to obtain a home loan even with a low credit rating. Here are a few tips to get you started.
Go specialist, avoid mainstream
There exist specialist lenders on the market that are known to be more inclined in offering one of their home-loan products to borrowers that hold a questionable credit score.
Obtaining a loan through them may be more likely because coupled with your credit score, otherwise known as an Equifax score, they also rely on face-to-face interaction as a means of reaching a verdict.
Whilst mainstream lenders often run your credit score through a computer system that automatically tells them whether they should consider you for a home loan, those who don’t meet the computer’s pre-requisites can often be automatically denied without having discussed their situation with the lender.
On the other hand, some less mainstream and specialist lenders value sitting down with a borrower to reach a more deeper understanding on whether they are able to tend to loan repayments, and at the same time give a borrower the opportunity to explain their low credit score.
When this happens, it’s advised to be transparent with the lender, although this can sometimes be of discomfort especially when having to disclose past financial problems.
Cut back on spending, start saving
Sometimes the past is best left in the past, and in the property sphere this can be achieved by steering your financials, equity, or extra income in an upwards direction.
When you sit down with a specialist lender to discuss your credit score and ability to repay a loan, being able to show how you’ve improved your situation will be highly valued, especially pointing to how you’ve cut back on any outstanding debts and saved money.
Ultimately, a lender actively looks for reasons as to why they should trust you with a loan as much as the risks you present, so being able to exemplify a turned leaf, or a change in sails, can only give you ticks in the right boxes.
Furthermore, and most importantly, having a cash deposit will bump up your eligibility for a loan despite having a low credit score – even more so if you also have the funds saved for the stamp duty and account fees.
Most lenders will want to sign you into Lenders Mortgage Insurance, which is an upfront payment made by the borrower if they plan to borrow more than 80% of a property’s total value. It’s a means of assurance for the lenders; if the borrower forfeits on the loan, the bank will be covered by mortgage insurance for any losses incurred.
Having at least 20% deposit saved will opt you out of LMI, making it one less thing for the lenders to assess you on.
Meet with a mortgage broker; don’t over-apply
Since a low credit score isn’t widely favoured, you may assume the more lenders you apply with, the higher chance you’ll have of receiving a green light. But did you know this approach can damage your file even more?
Each time you lodge an application with a lender, a red flag goes up on your credit history, so the more flags you wave, the more likely the lender will assume you’re experiencing financial difficulty.
Rather than reaching out to multiple lenders in desperation, a mortgage broker can provide some perspective and re-assurance first, whilst also helping you hone a viable strategy. They can also take a look at your credit score and offer possible instances where a credit repair service can look into your file and eliminate certain parts.
These are just a few handy tips to keep in mind, but meeting with a mortgage broker is the best approach, as their expertise can give you a more individually structured game-plan that effectively adheres to your credit score and borrowing power.