Did you suffer credit damage due to a divorce and need a home loan? Have you been knocked backed for a mortgage even though you’re now trying to get back on your feet?
Around 1 in 3 married couples get separated every year in Australia and it directly or indirectly leads to bad credit, usually through missed repayments.
Most banks rarely try to understand the reason behind your bad credit or how you’re now moving in the right direction.
How do I get a home loan?
Divorces can be really hard on you emotionally as well as financially, especially if you had a rough separation.
You may have missed your mortgage repayments because your household income was halved or because your spouse just wouldn’t cooperate and you couldn’t afford your loan anymore.
Many Australians can relate to the pain of divorce but most lenders don’t. They will avoid borrowers who have black marks on their credit file because they believe that such borrowers are more likely to miss their repayments again.
This is why most lenders have a list of qualifying criteria for bad credit home loans.
If you have just a small default of less than $500 and it’s been paid for more than 6 months ago then it may not be a big problem for you to qualify for a home loan. In fact, you may be able to borrow up to 95% of the property value.
On the other hand, if you have any unpaid defaults, then some specialist lenders may consider your application and you may be able to borrow up to 90%. The defaults need to have been fully paid before the loan is approved though.
Minimising credit damage after divorce
If you’ve just been divorced, here’s what you can do to reduce your black marks after divorce and give yourself a better chance at getting your home loan approved:
- Close off your joint accounts: Freeze all of your joint accounts, create a new one and make sure your partner can’t access it.
- Seek legal advice: You may need to speak to a solicitor to separate properties held in joint names or to prevent the sale of a property which is in your partner’s name.
The other thing you need to do is adjust to the change in your income:
- Gather your financial information: It’s a good idea to find and organise your financial documents such as utility bills, credit card bills, tax records, mortgage papers and insurance policies. This is especially true if you’re not used to managing your own money.
- Make a budget: Plan all your expenses and look at what you can spare. Saving a few dollars each week can make a huge difference over time.
- Get financial advice: It’s recommended that you seek financial advice from a financial adviser and an accountant to help you plan out your future finances.
Bad credit after divorce case study
Leo and Kate met each other at uni and instantly fell in love. They bought a house and started living together right after their graduation.
The house was worth $450,000 and they had to take out a home loan to support the purchase.
Leo started working for a software company as an analyst and Kate had been promoted to the role of sales manager at a hardware manufacturer. Their joint income was about $170,000 per year and they never missed a repayment.
They got married after a year and were cherishing the happy life they made together.
Everything was going well until one day Leo found out that Kate was having an affair with another man. Their marriage fell apart at that moment and both of them decided to get a divorce.
Kate moved out and hired a lawyer to represent her. The lawyer advised her not to make any loan repayments until Leo agreed to the divorce terms.
Leo also didn’t make repayments because Kate wasn’t and this eventually became the reason both their credit files got damaged.
This is a very common tactic during divorce proceedings. The problem is, no one really wins.
After eight months of negotiations between their lawyers, the terms of divorce were finally settled. Leo got the house but had to make alimony payments to Kate.
By this time, their mortgage was 8 months in arrears and Leo had to refinance the loan. Their lender rejected the loan because of the arrears and Leo had to seek a specialist lender who would accept his home loan application.
With the help of a mortgage broker, Leo found a specialist lender who was willing to listen to his case. He explained to the specialist lender that the credit impairment was a one-off thing.
With the help of evidence like his recent payslips and tax returns, Leo showed that he was in a financially stable situation and could afford the loan repayments.
The specialist lender approved the loan after seeing that Leo was in a strong situation and had made a mistake which would not be repeated.
Leo refinanced the mortgage back to a major lender after 3 years. He also got married again and has been living happily ever since.
If you’re in a similar situation, give us a call on 1300 889 743 or complete our free assessment form and one of our brokers will help you find a suitable solution.