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Have you run into financial problems recently or in the past? Maybe you’re self employed or you have irregular income. There are many reasons why Australians struggle to be home owners. Even if your financial problems have been few and far between, they may still hold you back on a mortgage application. Fortunately, there’s still hope. Even if you can’t access a traditional mortgage, there are bad credit home loans you may be eligible for.
What Are Bad Credit Home Loans?
Bad credit home loans are a mortgage option for people with a problematic credit history. These home loan products are designed specifically for borrowers who have black marks on their credit file, or a credit history that is not clear.
Bad credit home loans are also referred to as non-conforming loans, credit impaired loans, speciality loans, or low-doc loans. Lenders of these products are typically more willing to consider all situations, and are more likely to help ‘outside of the box’ applicants who do not conform to traditional banks’ requirements.
These mortgages typically have a much higher interest rate because the lender is assuming more risk. It also common for lenders to require a larger down payment, typically between 10-20% depending on the borrower’s financial situation.
Who Are Bad Credit Home Loans For?
Many people with bad credit want to become home owners, and conforming home loans exist to serve these people. Emergencies happen and life can sometimes wreak financial havoc. So how do you know if you need this type of loan? Bad credit home loans are a good for fit for borrowers who:
- have a bad credit history
- have current home loan arrears
- have credit card arrears or defaults
- have personal loan arrears or defaults
- have too many debts
- are unable to consolidate
- have filed for bankruptcy in the past
- have been declined by another lender
- are self employed
- have irregular income
If any of the above applies to you, bad credit home loans may be a good fit. Keep reading to learn how to increase your chances of approval.
Tips for Getting Approved
1. Get Professional Help
There are many credit repair organizations that may be able to help you improve your credit score. Even if you think you deserve the score you have, they may still be able to find errors and other adverse entries that can be challenged or removed, improving your score. It’s best to do this before you start loan applications.
2. Show Improvement In Your Financial Situation
If your financial problems are in your past, you may be in better shape than you think. Being able to show improvements in your financial situation and how you manage your money often helps in securing bad credit home loans.
Even if you’re still working through your problems, consistent improvements will help. Paying your bills on time, and maintaining a small savings account shows that you’re being responsible.
3. Don’t Use Mortgage Insurance
When you apply for a home loan, there are actually two approval processes taking place. Of course, you need your potential lender’s approval, but you also need the approval of the company insuring your home loan. If the lender says yes, but the insurer says no, you’re still out of luck. In many cases, the insurers are much more stringent, because they are ultimately response if you default on your loan.
There is one way around this. If you’re able to make a 20% down-payment, as well as cover all the fees associated with the home loan, you won’t be assessed by an insurer. In this case, you’ll only need the lender’s approval.
4. Avoid Automatic Credit Scoring
In most cases when you apply for a loan, a computer is making the decision to accept or reject your application. The computer will look at all the data in your application, as well as your credit history to assign you a score based on risk. If the computer decides you’re a high risk, you’ll be denied before a human has the chance to consider your situation.
Your best bet is to apply with a lender that does not use credit scoring, or at least doesn’t rely on it as much. Once a real person hears your story, they may be willing to take the risk and lend you the money—even if the computer says no.
All the major Australian banks use credit scoring, though, some—such as ANZ and Westpac—rely on it more heavily than others.
NAB and CBA use a combination of scoring and manual credit assessment, but although bankers at these banks can override a decision, they are generally still reluctant to do so.
5. Apply to a Specialist Lender
Just because mainstream lenders won’t help you, doesn’t mean you’re out of luck. There are many lenders who specialize in bad credit home loans in particular. Many will be willing to lend you the money you need , but for a higher interest rate. Don’t worry about getting locked in to a higher rate. You can always refinance in the future when your financial situation improves.
6. Don’t Make Too Many Applications
Getting a home loan with bad credit can be tough and it’s not uncommon to experience a few rejections. But too many credit applications make your credit report look even worse. Especially when those applications are denied. It’s important to figure where your best chance of getting accepted is and apply there first.
This is where a mortgage broker comes in handy. They know how all of the lenders work, and after taking a look at your personal financial situation, they’ll help you determine where you have the best shot. Remember, they’re on your side, so make sure you’re up front with them about the whole extent of your financial situation. It will make it much easier for them to do their job and increase your odds of success.