Having a bad credit rating can seriously hamper your chances of gaining a home loan approval. However, there are ways to give yourself the best possible chance of obtaining bad credit loans.
3. Seek professional advice regarding your credit report
Obtaining a copy of your credit report is the first rung on the ladder to approval of a home loan.
This report will outline all your financial history and show what led to your bad credibility rating, as well as being a great tool for planning how to improve said credit in the future. Overdue debts will be listed on your report for five years, regardless of being paid out or not. In saying that, it will also show the repayments that were eventually completed. Lenders will want to know how any past defaults were resolved, as this will show that even though there were past problems, you have made great progress toward fixing them.
Any inaccuracies with anything listed on your report should be corrected immediately, so as not to hinder your plans for making your home loan application. Contact the institution who made said errors to have them fixed, as well as the credit reporting agency so that your report may be updated properly.
4. Compare lenders but don’t apply with multiple lenders
Completing applications with multiple lenders will actually hamper your chances of securing a loan. Many people think having more applications means that eventually one will be accepted, however, this is not so.
Every credit application made to a lender will appear as an enquiry on your credit report. The problem here is that the enquiry result does not appear, therefore a lender doesn’t know if you have a few loans on the go, if all were declined or even if you decided not to accept them. Also, having a lot of enquiries can come across looking as if you have financial difficulties, putting up red flags as to your repayment abilities in the lenders eyes.
This doesn’t mean that you shouldn’t enquire and compare details of different home loans with different lenders, it’s important to have as much information as possible when choosing your lender. Only complete a formal application with your lender of choice though, not the others.
This is where doing your research comes in rather handy. You will find that not every lender will assess you upon your credit history. There are companies out there that were actually created to help everyone with their home owning dreams, despite the black spots on your record. These lenders will also take into account the circumstances behind said black spots and the steps you took (or are taking) to fix them. These will attract higher interest rates at first, but moving along you may be able to negotiate/switch to a lower one.
5. Apply with a mortgage lender who does not use credit scoring
Credit scores are calculated by analyzing the data shown on your credit files, creating a number representative of how good or bad your financial past has been. This means lenders that use this system will automatically decline your application via computer should your rating be classed as bad. Sadly, even though you may have extenuating circumstances behind your problems and may have even rectified them since, there is no chance to discuss this with a real person and see IF there is any way to help you.
As mentioned above in point 4 though, not all lenders use the credit scoring model and therefore potentially WILL be able to help you, as they will be considering your application based on all reason and rhyme behind any defaults or overdue payments contained in your financial record.
Bear in mind, the mainstream lenders more than likely will not proceed with your application if your credit report cannot pass certain criteria. This is where such specialist lenders price their products according to the risk the lender will present. This is where you will incur a much higher interest rate, but as aforementioned, as your payments are made and your situation improves, your loan can be re-assessed and the rate lowered.
Major banks will have a strict, non negotiable loan assessment criteria. Specialist lenders base their application approvals around an individual’s personal past circumstances, giving one with a bad credit rating the best chance possible of potentially being approved.
6. Avoid lenders mortgage insurance (LMI). Borrow at an LVR of under 80%
The amount of money borrowed against the value of the property will determine whether you must obtain the approval of either one or two parties. All must be approved by the lender of course, but if you wish to borrow an amount greater than 80% of the value, approval must also be given by a mortgage insurer. They protect the lender from loss if in the case you default upon your loan.
The higher the funds you already have in your possession, the greater your approval chances are. Generally, this will be 20% deposit for the property itself, as well as all incurred costs, namely stamp duty and any legal fees.