How To Get A Home Loan With Paid Or Unpaid Defaults

What Is A Default On A Credit File?

A default on a credit file is a formal record that a debt has become seriously overdue and has not been repaid under the original agreement. It is listed by a credit reporting body after the lender has issued the required written notices and the payment remains unpaid.

A default is usually recorded when:

• The account is overdue (commonly 60 days or more).
• The lender has sent formal written notices requesting payment.
• The debt is still unpaid after the notice period expires.

A default is not the same as a single late payment. It reflects ongoing non-payment and the start of formal recovery action.

Defaults can apply to many types of accounts, including loans, credit cards, car finance, utility bills, phone and internet contracts, and in some systems, Buy Now Pay Later accounts. Both secured and unsecured debts can result in a default if repayments are not met.

A default generally remains on your credit file for several years (commonly five years), even if it is later paid. If paid, it is typically updated to show as “paid,” but the record remains for the reporting period.

What Are Bank Requirements For Home Loan Approval With Defaults?

Defaults on your credit file should not get in the way of you getting approval for a home loan. Lenders consider all aspects of your defaults, including the types and number you have, how old they are, whether they are paid or unpaid, and their total dollar value.

To qualify with one of the banks for a home loan approval, you should have:

• No more than $500 in defaults if you’re borrowing over 80%
• No more than $1,000 in defaults if you’re borrowing up to 80%
• No more than two defaults in total for one application
• Paid the defaults at least six months prior to applying
• At least 5% in genuine savings if you are purchasing a property
• All other requirements not related to defaults in place
• A credible reason for your impaired credit history

Note: Meeting all these requirements does not guarantee that a bank will accept your loan but it will greatly increase your chances of approval.

What Are Your Home Loan Options If The Major Banks Decline Your Application?

Even if the banks can’t help you, there are many specialist home loan lenders that can accept your application. Once your credit history is clear, you can refinance the loan with a bank to get a better deal.

Typically, you will be able to borrow up to 80-85% of the property value with a specialist lender, even if you have small, unpaid defaults or larger paid defaults on your credit file.

Specialist lenders are more flexible. They charge somewhat higher interest rates in exchange for approving loans with more risk.

Specialist lenders gladly consider approving bad-credit home loans. They accept more applications with defaults than banks. They will listen to your explanation for your bad credit history. And they will consider a low-doc loan with less evidence of income.

However, specialist lenders also tend to be more conservative than the banks in some ways:

• They strongly disapprove of financing vacant land.
• Few specialist lenders offer construction loans.
• Few specialist lenders accept properties over 2 hectares in size.

Call our mortgage brokers on 1300 889 743 or fill in our free assessment form and we can help you get approved for a mortgage.

What Is The Difference Between Paid, Unpaid And Settled Defaults?

Defaults on your credit file will be listed as either ‘paid’, ‘unpaid’ or ‘settled’. The lenders can see the dates on which the defaults were lodged, the amounts of the defaults, the dates they were paid (if you’ve paid them), and who lodged the defaults.

Defaults remain on your credit file even if you pay them; however, a paid default will look slightly more favourable to lenders than an unpaid default.

It’s important that you are aware of what defaults you have, and the status of each, to avoid applying with an unsuitable lender and being turned down due to bad credit history.

Settled

A default is listed as ‘settled’ if you’ve come to an arrangement with the lender to pay some of the amount owing in return for the lender not pursuing the remaining debt.

This is seen more favourably than an unpaid default, although it isn’t as good as one that has been paid in full.

Current

A default is listed as ‘current’ if you’ve paid the overdue amount and the account is still open. For example, if you had a default lodged on your file due to a credit card, paid the amount owing, and are still using the card, it’s listed as ‘current’. These defaults should be viewed the same way as a paid default.

Clearout

A ‘clearout’ means the lender has tried to contact you several times and has been unsuccessful. Clearouts will remain on your credit file for seven years, instead of five years. In many cases, the reason the lender cannot find you is that you have been overseas or have moved address and haven’t informed the lender.

Regardless of the reason, this is seen as the borrower ignoring their responsibilities or avoiding the lenders. Lenders are extremely wary of approving a loan for someone with a ‘clearout’.

How To Apply For A Home Loan If You Have Defaults

These simple steps will improve your chances of approval:

• Provide a default explanation letter.
• Provide evidence to back up your explanation for your defaults.
• Save up at least 5% of the purchase price and provide as large a deposit as possible.
• Pay any unpaid defaults and get the credit provider to mark them as paid on your credit file before you apply for a loan.
• Apply with a lender that accepts borrowers with defaults.

Talk To The Experts

You can get approved for a home loan with defaults on your credit report, you just have to make the right moves for your situation. This is where we can help you. We can also assist you by linking you to credit repair companies if your credit score is too low.

Our mortgage brokers are experts at finding lenders for people with impaired credit. Please call us on 1300 889 743 or fill in our free online assessment form and one of our mortgage brokers will let you know if you qualify for a home loan.