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If you have a bad credit rating, getting a home loan may not be straightforward but it's not out of the question. There are a few options at hand.
1. Apply for a 'bad credit home loan'
There are home loans on the market designed for borrowers with bad credit, typically offered by non-conforming or 'specialist' lenders. They can be similar in structure to other home loan products but there's usually a catch, generally higher interest rates and fees and charges. They often also come with stricter terms and conditions. This is because lenders regard such loans as high risk.
As a result, bad credit home loans can cost much more than a regular home loan, especially over the term of a 30-year loan. For this reason, they are generally regarded as short-term fixes until the borrower's credit score improves and there are more options open to them on the market. They can be a good place to start.
2. Apply with a mortgage lender who does not use credit scoring
While the vast majority of lenders use credit scores to assess a borrower's eligibility for a home loan, there are some that don't. These loans are often referred to as low doc or non-conforming loans.
Some lenders offering such products may market themselves as being prepared to 'look beyond the numbers' and 'listen to your story'. They may also take into account whether your poor credit score is as a result of sickness or divorce or consider the circumstances of your bankruptcy.
The rules vary between individual lenders but again, the loans the offer will generally attract higher interest rates and fees. Although they will be more expensive, they can also get you on the property ladder until your credit score improves.
Low doc or 'bad credit' home loans
Considering taking out a low doc home loan? Here are some of the most competitive deals on the market for low doc loans:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
7.19% p.a. | 7.26% p.a. | $2,712 | Principal & Interest | Variable | $0 | $690 | 70% | |||||||||||
7.24% p.a. | 7.27% p.a. | $2,726 | Principal & Interest | Variable | $0 | $330 | 70% | |||||||||||
7.54% p.a. | 7.89% p.a. | $2,808 | Principal & Interest | Variable | $15 | $1,325 | 95% | |||||||||||
7.64% p.a. | 7.29% p.a. | $2,547 | Interest-only | Variable | $0 | $0 | 80% | |||||||||||
7.64% p.a. | 7.70% p.a. | $2,835 | Principal & Interest | Variable | $0 | $860 | 80% |
3. Try to avoid Lenders Mortgage Insurance
When you apply for a home loan, there are two approvals that must be met if you are borrowing more than 80% of the value of a property. One is from the lender and the other is from the mortgage insurer, who protects the lender in case you default on the loan.
When you borrow more than 80% of a property's value, many lenders will insist you take out Lenders Mortgage Insurance (LMI). On some occasions, a lender may approve the loan, but no insurance provider will be prepared to underwrite it, considering it too risky.
The best way to avoid this situation is to have the funds to cover a 20% deposit as well as the other costs associated with purchasing a home, such as stamp duty and legal costs. That way, LMI is not required, boosting your chances of approval.
However, if your deposit falls short and you are unable to secure LMI, some lenders may choose to charge a one-off 'risk fee' as an alternative. By doing this, the lender is effectively keeping the loan process 'in-house' and subject to their own policies. Such fees can commonly apply to some non-conforming or specialist loan products.
4. Demonstrate that you have improved your financial situation
There are many steps you can take to improve your credit score. These won't change it overnight, but they can over time as more positive information is added to your record and your poor credit behaviour gradually drops off your file.
There are some basic steps you can take right away to get your credit history back on track. These include:
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Checking your credit rating regularly and ensuring all the information on there is correct.
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Paying your bills and any repayments on time.
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Closing as many credit accounts as you can and keeping just one credit card. Lower its limit if you can. Try your best to lower or clear any credit card debt.
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Avoiding applying for any new credit products.
5. Seek legitimate professional advice regarding your credit report
There are a number of 'credit repair' companies in Australia that offer services to improve your credit rating with some also offering 'debt solutions'. Basically, these agencies collect and analyse your information and do their own research as to how your credit score is in its current position. Sometimes, they may find reasons to contest particular listings and try to have them removed from your credit report. But, of course, they can't remove those that are accurate.
They will also advise you on how to improve your own credit score. Costs vary between agencies but there is usually an upfront fee and additional fees associated with 'removals'. Some charge monthly fees.
But beware! Some credit repair services have been associated with scams while others are bordering on fraudulent. It pays to remember many repair services charge for what you can do yourself for free, so think carefully before engaging one. Paying a credit repair company may not actually repair your credit score either.
Ensure the credit repair company is licensed by checking ASIC's website. Select 'Credit Licensee' or 'Credit Representative' from the drop-down menu during your search. Always choose to deal with a licensed company for credit repair.
6. Shop around for a loan before applying
It's always good to shop around for a home loan but in this case, that means doing your homework, not making applications with multiple lenders. When you apply for a loan, it is generally recorded on your credit report, regardless of whether the loan is approved or not. In simple terms, if you make multiple loan applications within a short period, lenders can look on this as an indicator you have been rejected for the loans and regard you as a risky borrower.
The best advice is to apply to the lender which is most likely to approve your loan application. A good mortgage broker can be invaluable in advising what products on the market will best suit your circumstances. It's always best to be upfront and honest with your broker about your poor credit history. A broker is not there to judge but to help you find the best loan and guide you through the application process.
If you have a bad credit rating, getting a home loan could prove difficult. There are however some steps you can take to give yourself the best chance of being approved.
Image by Wes Hicks on Unsplash
Original article by Nila Sweeney published 8 November 2017
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