What Is A Default On A Credit File?
A default is a record on your credit file showing that you have an overdue account, such as a loan, credit card, utility bill or phone contract. Any account is classed as overdue if a payment is 60 days late or the lender has been unable to contact you.
Defaults are lodged on your credit file with rating agencies and lenders access this information when you apply for a loan. Hence, you cannot hide your existing defaults from banks or lenders.
If you’re applying for a home loan with a default, prepare an explanation for why you defaulted on the debt and submit it with your loan application, along with evidence to back it up. This will help show lenders that you are still a low credit risk.
Some defaults could be your lender’s fault, as many lenders fail to manage their customer databases well. You can contest a default in such a case.
Requirements For Home Loan Approval From A Bank
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.
Can’t Get A Loan From The Big Banks? Specialist Home Loan Lenders Can Help You
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 Will The Lender Know?
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.
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.
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.
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.
Frequently Asked Questions
Different debt amounts and the time it took to pay them can significantly influence your eligibility for a loan.
You should be aware of the following terms:
- Clean credit: No defaults to date.
- Near prime: Minor default of less than $500 that was paid more than one year ago or excessive enquiries on your credit file. Most lenders can approve a loan for you without any problems.
- Below average: Default amounting to less than $1,000, paid more than six months ago. Some prime lenders and major banks can lend you up to 80-85%; they assess on a case-by-case basis.
- Bad credit: More than $1,000 in defaults but all paid. You can get approval with a specialist lender. If you have a very good explanation backed up with evidence, you may be able to borrow 80% of the property value with one of our banks.
- Serious credit impairment: More than $5,000 in defaults where some are paid and some are unpaid. You still have a chance of approval with a private, specialist or non-conforming lender.
Yes, you can get a low doc loan with defaults on your credit file.
The qualifying criteria can be a little complicated, as specialist lenders have tougher lending guidelines for low-doc loans.
Call us on 1300 889 743 to let one of our low-doc specialists show you what’s available.
Late payments are listed on your credit file if they’re overdue by just two weeks. They will lower your credit score, but not in the way a default will. Luckily, specialist lenders and select banks can still consider your home loan application. You only need to find the right lender for your situation.
In the past, lenders could see only the paid or unpaid defaults listed on your credit file. Today, many lenders have signed up for Comprehensive Credit Reporting (CCR), which allows them to check your entire repayment history.
A default will remain on your credit file for five years if payment was overdue and seven years if it was lodged because the lender couldn’t contact you.
You cannot remove a default from your credit file. Paying the default doesn’t help with this. However, it does change the status to ‘paid’, which lenders see more favourably.
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 assessment form and one of our mortgage brokers will let you know if you qualify for a home loan.