Life doesn’t always pan out the way you’d like it to. Whether it’s through divorce, losing your job, injury or business failure, your finances can sometimes be thrown in turmoil through no fault of your own. This can result in you accruing an unsustainable level of debt and then struggling to meet those liabilities.
Other times, it’s the rising cost of living that can cause people to easily get into debt and bite off more than they can chew.
At worst, you can be hit with a judgment, court writ or bankruptcy. But did you know that any default you have, be it unpaid phone and utility bills and tax, can play a crucial role in your ability to borrow? All of this information is recorded in what is known as your credit file and it is one of the tools used by the banks when they assess your home loan application.
Around 14% of Australians have a default or other black mark on their credit file (Australian Retail Credit Association) but only 10% have actually ever seen theirs (illion, Dun & Bradstreet).
Another 6 out of 10 haven’t even heard about credit reporting (illion, formerly Dun & Bradstreet), which is surprising considering its importance in your mortgage application.
There are ways to find out if you have a bad credit history without having to get declined for a home loan and adding yet another enquiry to your file!
Better yet, we know exactly how to help people with a bad credit history get approved for a home loan.
What is bad credit?
Bad credit can come in many forms and your credit file is usually the first place the bank will look when assessing your application.
As mentioned previously, very few Australians are aware that they have a black mark, that is, until it comes time to apply for a home loan.
The information on your credit file remains there, for every bank and lender to see, for differing terms depending on the nature of the black mark:
- Current debt repayment history: 2 years
- Court writs and summons: 5 years
- Enquiries: 5 years
- Defaults: 5 years
- Court judgements: 5 years
- Defaults (Clearout): 7 years
- Part IX: 7 years
- Bankruptcy: 5 years from the date you become bankrupt or 2 years from the date you were discharged, whichever is later.
- Last known address and employer: Indefinite
Although your credit file forms a large part of their assessment, the bank’s own credit score is also based on things like your employment stability, income and the security for your loan.
Bad credit includes:
- Missed home loan repayments.
- Defaults, bankruptcy, judgments, court writs and having too many credit enquiries on your file.
- Credit history with a particular lender, which is crucial if you want to get approved with that lender.
- Unpaid bills or tax.
- If you own a company facing financial trouble, receivership or liquidation.
- Excessive unsecured personal debt compared to your current income and asset position.
Too many enquiries can be a problem
Not many people are aware that having excessive activity on their credit file, that is, too many enquiries, is a bad thing.
Think you may have a bad credit file? Get a free copy of your credit file from mycreditfile.com.au and email it to your mortgage broker.
They can tell you whether your history may be problem and they can also help you with a strategy to improve your credit score with a bank.
This is much better than applying for a loan with two different banks, getting declined and then coming to us for help! Bank three is unlikely to throw out the welcome mat, if you know what I mean.
Bank three was probably the best option for you in the first place so if you know that you have at least one default on your credit file, your broker can check. That way you can avoid adding yet another unnecessary enquiry and, instead, get approved the first time.
Does my Equifax score matter?
A number of lenders rely heavily on your Equifax Score (previously VedaScore) when they complete their own credit score. This is generated completely by computer and depends solely on the accuracy of the data inputted.
That means your application could be declined before it is even seen by a real person. Ridiculous!
The way in which your application is credit scored varies drastically from lender to lender but a good mortgage broker will have an excellent understanding of the system used by a number of banks and lenders.
Since March, Veda (now Equifax) began collecting your repayment history for the last two years as part of your credit file. That means if you already had a shady credit history, banks now have more fodder than ever to decline your application.
Some banks take a more balanced approach to applications, focussing more on things like your income and asset position. Some smaller lenders don’t credit score at all!
How much can I borrow?
In some cases, we can help people with bad credit borrow up to 95% as long as you only have a default for less than $500 and it has been paid more than six months ago.
For paid defaults up to $3000, you may be able borrow up to 80% of the property value with a prime lender, up to 90% of the property value with a specialist lender or up to 100% of the property value with a guarantor loan.
How can a non-conforming lender help?
Any default, regardless of the size or the nature of the default, will be looked upon negatively by a bank.
Think of it as a red mark against your worthiness as a borrower. It says you left an obligation of yours unpaid for 90 days as a minimum. Of course, you can also earn yourself some “ticks” if, for example, you’ve been in the same full-time job for more than three years.
A specialist mortgage broker will take an analytical approach, breaking down your situation into who you are as a borrower and what your needs are.
Depending on the level or your credit impairment, they will be able to tell you which bank is willing to actually consider your application.
Despite the banks conservatism, their decision to lend to someone that’s a little outside of their lending policy really comes down to the banks level of risk at the time of your application.
You could have a friend or relative with bad credit that got approved 6 months ago but it doesn’t mean that you will get approved with the same bank as well.
That means your broker will move on “down the list” to non-banks and then finally non-conforming lenders.
These lenders are often more flexible than the major banks, taking a more balanced approach when looking at your case. They look into the nature of your bad credit including the amount defaults you have and if there’s a legitimate reason for any adverse listings.
In fact, with a sufficient explanation and strong evidence, you may be able to borrow up to 90% even if you have paid debts of over $3,000 (but no more than $5,000).
Will I pay a higher interest rate?
If you are deemed to have a bad credit history, then your ability to get approved and the amount of interest you’ll pay will be determined by your loan to value ratio (LVR):
- Less than 60% – negligible risk
- Between 60% and 80% – low risk
- 1% to 85% – medium risk
- 1% to 90% – medium high risk
- 1% to 95% – very high risk
- 95%+ – extreme risk
For home loans less than 80% LVR, you may qualify for the same interest rate as someone who has no adverse listing on their credit file.
Of course, every situation is different and, with the right broker, there may still be great interest rates available to you.
What if I have no credit history?
If you’ve never had a credit card, a personal loan or been on a mobile phone contract, doesn’t this mean you’re good with your money and living within your means?
The banks tend to take a conservative approach when lending, so to them you’re an “untested” borrower and pose a high risk.
Some will want to see you kitted out with a credit card or other form of credit for at least 6 months, after which you shouldn’t have much problem getting a loan. After that, you’re free to keep scraping your echidna coins.
Have you considered debt consolidation?
Consolidating multiple debt facilities such as credit cards and personal loans into one your home loan is great way to get on top of your finances.
Instead of making multiple repayments you can simply make one monthly repayment at a lower interest rate.
Debt consolidation is a better option than entering into a debt agreement or part IX agreement, which is an alternative to declaring bankruptcy which sees you entering into a legal agreement with creditors in order to satisfy your debts.
How banks judge judgments
For banks, judgments are a bad thing to see on a credit file. It says to them that not only have you had financial trouble in the past but you were unable to resolve it outside of court.
Worst still, a judgment is placed on your credit file as soon as a magistrate makes the order for you to pay the default and will remain there for 5 years.
Ultimately though, most major banks don’t (nor care to) know the reason behind the judgment or whether you were at fault or not, which is where non-conforming lenders may be the better option for you.
They will ask for a written explanation of what occurred backed up by strong evidence and if they like what they see, you may well be able to borrow up to 90% of the property value.
Even though the judgment will remain on your credit file for 5 years, it’ll help your case (and may well be a requirement) for you to pay the judgment before you borrow.
Get the green light even with a big, black mark
You can still borrow if you’ve previously declared bankruptcy in the past and are now ‘discharged’ bankrupt.
Being deemed a discharged bankrupt varies but it’s usually after 2-3 years living as bankrupt.
Think of being a discharged bankrupt as the opportunity to “prove yourself” to lenders that your bad credit history is history and you are now in control.
Pay your bills, rent and other commitments on time and open new accounts and manage them properly!
You may be able to borrow up to 90% of the purchase price of a property with a non-conforming lender but you will need 14% to 16% of the purchase price to cover your deposit, stamp duty and lenders mortgage insurance (LMI).
You could even score yourself discounted interest rates if your loan is for no more than 80% LVR and you can provide evidence that you are paying your bills on time; you can provide evidence that the bankruptcy was a one-off event that was not your fault; and you’ve been discharged for a particular period of time such as 12 months.
If you’ve managed to keep your home after being declared bankrupt, you may even be able to refinance to a new lender as long as you can prove an excellent repayment history for the last six to twelve months with bank statements.
For people who are currently bankrupt, you won’t be able to get mortgage with bank but a specialist financier may be able to help.
Do you have a bad credit history? We know which lenders can help and can find you a home loan that best suits your needs.
Call us on 1300 889 743 or fill in our free assessment form today.