A guarantor home loan with bad credit – Is it possible?

Typically, the combination of a guarantor home loan with bad credit is simply not accepted by lenders.

It is only under exceptional circumstances that this is possible.

Find out how we were able to help?

The story

Tammy and Dave were a couple with stable jobs and decent income who were looking to buy a house.

Tammy worked as a full-time nurse and Dave worked as a Foreman with a motor company.

They were looking to buy an owner-occupied property for around $680,000.

However, they didn’t have a lot of savings and were looking for a guarantor home loan.

Their guarantors owned their property outright and were happy to provide the guarantee.

While the deal seemed pretty straightforward at first, it quickly became apparent that it was anything but that.

They were looking to borrow the full value of the property $680,000 plus costs to complete the purchase such as stamp duty, legal fees etc.

The couple were very confident that they would find a lender; however, they were knocked back by every bank they approached.

Surprised and confused, they found us online and enquired.

Our specialist mortgage broker Romy Dhungana, made the first contact.

So, what was the problem?

The devil is in the detail

After performing a full credit assessment, it became quite clear why lenders were declining their home loan.

Tammy had two defaults with AGL Sales P/L listed on her credit file from 2015:

  • A utility default of $1,565
  • And a telecommunication default of $996

Paid defaults are considered by a few lenders on our panel, however, a guarantor loan with bad credit just isn’t accepted by lenders.

As defaults reflect a client’s character, lenders see this kind of applicants as a higher risk.

Because ultimately, they could jeopardize the guarantor’s property if they are inconsistent with their loan repayments.

Banks are also acutely aware of the reputational risk especially after the Royal Commission’s report on banking.

Further complicating matters, they also had a large number of credit enquiries listed on their credit file.

Like many borrowers, they were not aware that when they enquired with credit providers, all the enquiries are listed on their file, and this, in turn, reduces their credit score.

A resourceful solution

The first thing was to discuss with the couple as to the reason for the default listings.

After digging a bit, it became evident that the couple had not updated their new address with their service provider, AGL, when they had moved in 2015.

The couple was not aware that their outstanding rate notices were being sent to their previous address.

Subsequently, after getting no response from the couple, AGL had listed the defaults.

It was a genuine case of uninformed listing.

With all the information at hand, Romy gave a shot at negotiating an arrangement with AGL; wherein, they would agree to remove the default if the clients paid in full.

After a successful month long negotiation, the defaults were paid in full and were finally taken off their credit file.

Now that the root cause of their problem was solved, there was another issue.

The issue being the large number of credit enquiries on their file as even after the defaults got removed, they still had a low credit score.

Hence, we couldn’t recommend them to prime lenders as the system would have automatically declined their application based on the score.

The key was to find a lender that doesn’t credit score and can accept guarantor loans for up to 105% loan to value ratio (LVR).

Even with a lender that doesn’t credit score, the credit assessor could decline the loan based on the character reflected by the applicant’s credit file.

But with proper reasoning/clarification letter from the clients on the defaults and those enquiry listings, they considered the applicants as a victim of circumstance and approved the mortgage.

A happy ending

The couple moved into their property and were happy to be rid of the black marks on their credit file.

More importantly, they came out of this process much informed on how credit scores worked and how lenders view them.

Key takeaways:

  • Always be wary of notifying your telecom or utility provider when you’ve changed your residential address.
  • A slight effort in keeping tabs on all your existing commitments can result in maintaining a sound credit file.
  • Always ensure that all the information on your credit file is correct and up to date.
  • To do this, get your free annual credit report from any of the three major credit reporting agencies such as Equifax, Experian or Dun & Bradstreet.

Even if you can’t get a home loan now, we can help you prepare to buy in the near future.

Please give us a call on 1300 889 743 or fill in our free assessment form to start your home buying journey today.