Note: Due to the COVID-19 pandemic, lending criteria have changed. Please contact us for more details.
It’s hard enough as it is to get approved for a construction loan, and it might seem impossible to get a construction loan with bad credit.
However, having bad credit should not stop you from building your dream home.
We have bad credit construction loan lenders on our panel who can help.
How much can I borrow?
Most lenders tend to reduce the loan to value ratio (LVR) to less than 80%, due to the high risk of a bad credit construction loan.
Fortunately, we have a few non-conforming lenders on our panel who can let you borrow:
- Up to 95% LVR inclusive of Lenders Mortgage Insurance (LMI) available with one lender. The maximum amount you can borrow is $850,000, and the minimum loan size is $50,000.
- Up to 85% of the on-completion value if only 12 months have passed since the adverse listing on your credit file.
- 75% of the on-completion value with an unlimited number of defaults or judgements. The maximum loan size is $1.5 million.
What types of bad credit are considered?
Construction loan lenders on our panel accept the following types of bad credit:
- An unlimited number of default, judgement or writ or write off of up to $1,000 (paid or unpaid).
- An unlimited number of default, judgement or writ or write off of more than $1,000 that has been registered for more than 24 months (paid or unpaid).
- One day discharge from bankruptcy.
Are there any location restrictions?
Yes, most lenders restrict building a property between CAT 1 (major capital cities and large towns) and CAT 2 (medium towns) categories if you have bad credit.
Fortunately, we have lenders on our panel who will allow construction loans at all locations at an LVR between 75% to 85%.
Interestingly, a lender on our panel will let you borrow up to $1 million at 85% LVR if you are building a property in New South Wales or Victoria.
How do I qualify?
Banks and lenders will take a common sense and risk-averse approach to lending to borrowers of construction loans with bad credit.
If you can give a valid reason for the credit impairment and that the impairment is a non-recurring one-time event, then lenders will look into this favourably.
Furthermore, you have to make sure that construction will start within 3 months of settlement and is complete within 15 months of settlement.
Also, you have to ensure all the required documents for a construction loan are in place.
How do I prove my income?
For PAYG applicants, you will need to submit the last 2 payslips and one of the following:
- Letter of employment
- Tax assessment notice
- 3 months bank statement
- Latest group certificate
For self-employed applicants, you will need to submit:
- Last 2 years tax returns and
- Last 2 years tax assessment notices
Some banks are more flexible when lending to self-employed borrowers with alternative income documentation as well.
We have lenders on our panel who are offering competitive low doc construction loans.
Are interest rates higher on bad credit construction loans?
We can help you find a lender that best suits your construction needs and help you get a competitive interest rate.
The interest rate that you may get depends on the severity of your bad credit.
If it is a minor credit issue, then your interest rates could match a borrower with a good credit score.
Specialist lenders offer interest rates around 2% to 2.5% higher than the standard construction loan due to the risk associated.
The good news is you can refinance to a lower interest rate once your credit score improves or if the LVR is less than 80%.
Why build instead of buying?
You save thousands of dollars on stamp duty if you build a house, rather than purchasing an established property.
Since the stamp duty is levied on the value of the land, you can significantly reduce the stamp duty payable when buying vacant land and building compared to buying an established property.
For instance, if you’re buying land for $350,000 and paying $350,000 for building costs rather than buying a house for $700,000.
The stamp duty ranges between $6,300 to $13,870 on the land(as stamp duty charges differ according to states).
However, when buying a $700,000 house, the stamp duty ranges between $20,000 to $37,000, which is way higher than the stamp duty for vacant land.
What happens if my partner is the one with bad debt?
Your partner’s bad credit will have an overall impact when you’re making a joint application on your home loan.
This is a common occurance as such there are some options available to you like consolidating the debt of the partner or delaying building a property until the bad debt is cleared.
What is the maximum loan term for a construction loan?
Usually, for construction loans, the maximum loan term is 30 years.
Interestingly, we have a lender on our panel who will accept a maximum loan term of 40 years for a bad credit construction loan.
How much deposit do I need?
We have a lender on our panel that will let you borrow up to 95% – so you will need a minimum deposit of at least 5% and also funds on standby for contingencies.
It’s a good option to have a larger deposit saved to account for any planning variance as there could be additional costs like landscaping, fencing, etc which might not be included in the builder’s specifications.
What can I do to improve my chances of approval?
You’re already giving out a red flag to the lender as you’re applying for a construction loan with bad credit.
Here is what you can do to improve your attractiveness as a borrower to bad credit construction loan lenders:
- Get working on improving your credit score as soon as possible.
- Look at your credit file carefully and make sure to remove any listings that are not supposed to be there.
- Increasing the size of your deposit dramatically helps. Try to get at least a 20% deposit saved, so you don’t have to pay Lenders Mortgage Insurance.
- If the negative listings are only a few months away from coming off your credit file, then you may want to postpone your construction plans.
- If you have incurred any new debts, pay them off as soon as possible. This shows the lender that you are serious towards improving your credit score.
- Cancel all your unused credit cards as this does improve your borrowing power. For example, if you have two credit cards with $10,000 limit, then your borrowing power will be reduced by $20,000.
- Take note of how much you’re using on buy now pay later schemes like Afterpay and Zip Pay as this is accounted for when assessing your borrowing power.
Let’s get started on building your dream home!
There are options available to build a home with bad credit if you know where to look.
Our mortgage brokers are credit experts who can assess your situation and get you the best deals according to your construction needs.
Please call us on 1300 889 743 or fill in our free assessment form to find out if you qualify for a construction loan with bad credit.