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Last Updated: 10th April, 2024
A poor credit history can be a problem when you are trying to get a home loan. Bad credit home loans can be more expensive and complicated than loans for borrowers with good credit. But this doesn’t mean your applications will always be rejected if you have bad credit. There are ways you can get a home loan with bad credit.

1. Explore Bad Credit Options

There are borrowers with defaults who qualify for a bad credit home loan. The total amount of your default is important because some lenders accept small, paid defaults. Lenders also favour applicants with settled defaults. But there are some cases where lenders even accept large, paid defaults and unpaid defaults, as long as you can provide a good reason for why you defaulted. To increase your chances of home loan approval, you should write a default explanation letter explaining what caused the default. A good letter takes ownership of the default, gives strong reasons for it, describes whether it was listed on your credit file by mistake, and explains how you plan to take steps to avoid similar defaults in the future. Justifiable reasons for default include illness, marriage breakdown, an overseas move or a dispute with your utility provider.

Can I Get A Home Loan If I Have Been Bankrupt?

Yes, you can get a home loan if you have a discharged bankruptcy. However, some lenders may consider your application risky and decline it. It’s important to find a specialist lender who approves such applicants. You are eligible to apply from the first day your bankruptcy ends but most lenders only accept applications at least two years after your bankruptcy is over. Here is the story of one of Home Loan Experts’ clients, who had a discharged bankruptcy and was able to secure a loan:

The Story

Lucas and Olivia are a married couple with two dependants. Lucas earns $140,000 and Olivia earns $104,000 annually. Both of them have been employed for over three-and-a-half years. They were looking to purchase an owner-occupied property.

The Problem

Lucas and Olivia had a business but they couldn’t sustain it due to market conditions and COVID-19. They had to declare bankruptcy due to the loss of their business. They were discharged from bankruptcy in early 2022. Their credit score had dropped and since their bankruptcy was recently discharged, major lenders would not look at them. They were searching for mortgage brokers who would handle complex applications.

The Solution

They reached out to Home Loan Experts after finding out we work on applications with bad credit. Rojan Paudel, one of our specialist mortgage brokers known for finding the best solutions for clients, was connected to Lucas and Olivia. He was able to find ways to help the couple secure a loan. Rojan:

  • Identified lenders that would accept applications with a discharged bankruptcy.
  • Noticed that both Lucas and Olivia are PAYG permanent employees with a stable employment history and a good annual income.
  • Noticed that they have low childcare costs, as they have flexible work arrangements and can work from home.
  • Noticed that they have minimal liabilities, which mitigates the risk they present.
  • Attached a promotion letter from an employer as evidence that one of the pair had received at least four pay raises in the same year.
  • Convinced the lender that Lucas and Olivia were making efforts to improve their credit score.

The Happy Ending

In the end, Lucas and Olivia no longer had to worry. The couple was able to secure a home loan of $750,000 for a term of 40 years, with a 90% Loan-to-Value Ratio, despite having to pay a risk fee of $14,000. They were thrilled to have achieved their dream of owning their own home.

2. Explore Lenders Who Can Help You

Some lenders have strict eligibility criteria and don’t accept borrowers with defaults. However, some specialist lenders tailored to these circumstances can approve your application with a poor credit score. You can go for non-conforming lenders who are willing to overlook your credit problems and approve the loan. They have flexible requirements compared to traditional banks but tend to be more expensive with stricter repayment conditions. Such loans may also require a larger deposit. Some lenders in our panel can approve your loan even if you have a bad credit history. Call us on 1300 889 743 or fill in our free online assessment form today!

3. Get A Pre-Approval

You should consider getting a pre-approval because it will help determine if you meet the lender’s basic eligibility criteria. It requires less documentation than the full application process, so you can take this option to see if your credit history is a red flag for the lender. Note, however, that getting pre-approval doesn’t give you a full guarantee that you will get formal approval. This will save you from applying for a standard loan application, which will potentially hurt your credit score if rejected. It will also save you time and effort because you will not be required to arrange extensive paperwork to complete a full application process.

4. Connect With A Credit Repair Agency

There are chances of errors on your credit file. Credit repair agencies check if there are any incorrect listings and remove them from your file. This will help you maintain a clean credit file, increasing your chances of getting approval for a home loan. They cannot remove items from your credit report unless they are confirmed as errors. Note: You don’t need to pay a credit repair agency to clean up errors in your credit report. Home Loan Experts brokers can help you connect with credit repair agencies and remove negative listings before you apply for a home loan.

5. Take Steps To Improve Your Credit Score

You cannot change what happened in the past but you can take steps to avoid such problems in the future. You might want to show the lenders that you are doing your best to address past credit mistakes and improve your credit score. You need to ensure that any defaults are paid and any outstanding debts are settled before applying for a loan. Don’t make multiple loan applications in a short time. It will hurt your credit score. The idea is to avoid getting more red flags from prospective lenders and assure them that you are a good borrower.

6. Apply For A Joint Home Loan

If one partner has a poor credit score, it is possible to get a home loan using the other partner’s good credit. You can apply for a joint home loan. This doesn’t guarantee approval, because lenders assess your partner’s application alongside yours – but it can help. For most lenders, you will need to meet their minimum scores to be considered. You can also apply for a two-borrowers, one-owner home loan. This means you both are borrowers but, for example, you make the owner the one with the high income and clear credit.

7. The Bigger Your Deposit, The Better Your Chances

The bigger your deposit, the better your chances of getting approval. It minimises the risk for lenders. The bigger deposit shows the lender that you are making a bigger commitment and will not repeat the same mistakes. Bad credit home loans generally come with some disadvantages, including high interest rates and tighter limits on your borrowing capacity and requirements for a larger deposit. Lenders require these terms because insurers charge more to cover the loan in case of defaults. If you can increase the size of your deposit, you may be able to get better terms.

How Long Does Bad Credit Information Last In Credit Reports?

Generally, negative information, such as late or missed payments, bankruptcies, judgements, unpaid taxes, and loan defaults will remain on your credit report for about seven years. Hard enquiries will stay for two years.

Get Help From A Mortgage Broker!

You can get a home loan with bad credit. But it may pose some challenges. Don’t let your bad credit history hold you back. Home Loan Experts’ specialist mortgage brokers can help borrowers with complex applications get approved for a home loan. Talk to us about your situation. We will look at the options and find a lender who’s likely to approve you. Call us on 1300 889 743 or fill in our free online assessment form today!