What to do if you have bad credit but can afford home loan home loan repayments
Part 9 Home Loans - You have bad credit but your part 9 debt agreement is over or your defaults are greater than 12 months old!
If you a looking for a home loan you will learn very quickly that most banks prefer to deal with borrowers who have a perfect credit history. A banks main objective is to generate profits and reduce risk. When it comes to part 9 home loans or loans for people who have just come out of their part 9 agreement this is particularly true. So when a bank has a large pool of customers to choose from and a specific amount of funds to allocate in a given period it is only natural ( in their eyes ) to exclude certain customers. Borrowers who have had credit issues in the past are perceived as riskier & because they are viewed this way will in general be excluded from finance with certain banks.
In general, loans for people with some degree of credit impairment are referred to as “bad credit loans”. However, as mortgage brokers we use the phrase “specialist lending”. This phrase is more accurate as it best conveys what we do when finding a home loan for someone with bad credit. We seek to find you a home loan from a panel of “specialist lenders” who deal with bad credit situations on a daily basis.
Credit impairment could be as simple as an unpaid phone account listed on your Veda file right through to a past bankruptcy. It is your brokers job to match you with the correct lender – the lender that is comfortable with the facts as they are. Your broker is not there to try and force a round peg in a square hole.
The Major Causes of Bad Credit
Credit problems can result from myriad issues, including but not limited to:
- The end of a marriage
- Layoffs or job losses
- Personal injuries
- Business failures
- Commercial losses
Generally, an unforeseen event occurs and there is no strategy in place to protect the customer. As a result they are not able to meet their financial commitments.
What is Bad Credit?
Bad credit, or a low credit score, comes in several varieties. In searching for a home loan, the most serious type of credit problem is missed payments on an existing mortgage. The number of payments late or missed and the number of days in arrears create a much higher risk that you will not repay the new loan in a timely fashion. Refinancing loans are equally difficult under these circumstances.
Other borrowers may have multiple negative entries to their credit file, including defaults on other loan instruments, bankruptcy filings, court writs and judgments, and even an excessive number of credit inquiries to the borrower’s credit file. Of particular concern should be any defaults or late payments to the same provider who is processing the current application.
Past due bills and tax authority payments will also show up as negative marks on your credit score. If you have pending council rates or open tax bills, they may not show up on your credit report, but will be shown on the loan supporting documentation. Furthermore, the debt to income ratio of the borrower is a critical issue. If your ratio does not meet the lenders requirements, your application can be immediately declined, as the service on the loan would either be completely beyond your means or would create an undue hardship.
It is possible to remedy much or all of the negative information in your credit file. Once you have completed a review of your file, determine if you have the time and ability to clear the negative items before applying for a loan. In this case, the lender will not see a negative report, and you may qualify for normal mortgage loans without any increased interest rates or fees. Many credit repair companies are in operation, but ensure that you are dealing with a reputable supplier to avoid scams.
Be Aware of the Information in Your File
Banks use your credit file to perform the assessment. Among other things, your credit file contains full identifying information, including name, current and previous residence addresses, date of birth, your driver’s license number, and current and previous employers. If you’ve applied for any loan or financing in the previous 60 months, the credit review performed by the potential lender shows up as an inquiry on your credit file. If you have an excessive number of inquiries, this alone can drive your credit score down. The file will also include any court writs or judgments and bankruptcy filings.
There are many online services that allow you to review your credit file and take the opportunity to contest any incorrect information. We advise at minimum an annual review of your credit report.
Seeking the Right Package
Lenders who normally handle traditional loans will probably not take a risk on a borrower with bad credit, even with solid explanations behind the negative rating. The risk profile simply does not match the lending policies of most institutions. In this case, a broker who is connected to specialist and non-traditional lenders can make the difference between an approval and a decline.
These lenders have more open guidelines for loan approvals. It should be noted that non-traditional lenders typically carry a higher interest rate to offset the added risk of working with bad credit borrowers. There is an inverse relationship between the credit score and the interest rate. The lower the credit score, the higher the interest rate will be, but loans below 80% of the property value will be easier to source. Severe credit problems and applications for loans over 80% of property value will drive the interest rates much higher. Loans are assessed individually, and the explanations behind the credit problems can make a difference with some loan providers. Approvals are normally quicker than average.
There are number banks and non bank lenders who offer non-conforming loans or specialist loans to consumers with credit problems. It is your brokers job to know which lender is the right fit for you. Your broker will not try and put a round peg in a square hole.
The lenders that consider applicants with credit issues or needing a part 9 home loan may include, but are not limited to:
- Bluestone Mortgages
- LaTrobe Financial
- Liberty Financial
- Pepper Home Loans
- Adelaide Bank
- Provident Capital
- Widebay Australia
- and MKM Capital
Don’t worry about which lender too much. Your broker will know exactly which lender is right for you once you have had your first conversation. Each lender or bank has a clearly defined “credit policy” which acts as their guidelines for what is and is not acceptable them them. Each application is assessed within this framework. The policy of some lenders mirrors each other while some lenders have unique and flexible guidelines.
Improve Your Chances for Approval
To improve your chances of default, understand some of the criteria that the banks will assess and determine if your current situation meets normal requirements.
- Do you have minor defaults of $500 or less on your credit record? If this type of default has been cleared for over six months, your loan is more likely to be approved at up to 90% of the property’s value.
- Does your report show multiple minor defaults? When these defaults amount to less than $1,000 for issues with financial institutions or less than $500 for other creditor types (like utility companies), approvals are possible for 85 to 90% of the property’s value.
- Are there larger defaults on your credit history? Major defaults up to $3,000 that have already been cleared can still lead to an approval of up to 80% of the property’s value, without resorting to a non-conforming lender. In some cases, you may be able to borrow 100% of the property’s value, but this will require a guarantee. This can be provided by a parental security guarantor loan, among other instruments. As the size of the default grows the difficulty in approval increases. Problems up to $10,000, if already cleared, may still achieve approval. Each application is considered individually, and the reasons behind the default are important. Be prepared to provide evidentiary documentation to support the explanations.
- Do you have any unpaid defaults? This will drive you directly to a non-conforming lender. Even these specialized banks will cap your loan at 80% of the property’s value. Judgments or court writs on your credit report will have a similar effect. Paid defaults and unpaid defaults, as well as settled defaults (there is an agreement in place to clear the debt) will still show on your credit report. All of these items have a negative impact on your file and your credit rating.
- Are you currently under the terms of a Part IX agreement or a bankruptcy? For loans with these conditions, consult your broker directly, or perform additional research under these specifics.
- Does your file show an excessive number of inquiries? Prime lenders are looking to see not more than 2 inquiries in the past six months. Some non-conforming or specialist lenders may still approve loans with more inquiries on record.
- Is your current mortgage current? If you have past due payments, late payments, or missed payments, your mortgage loan is in arrears. Traditional lending institutions will not lend you money under these conditions. If your loan is new (less than one year old), the situation is even more critical. A specialized mortgage broker may still be able to find you financing, but it is a very difficult set of circumstances.
Here we will offer some additional short information related to the points above.
Debt judgments: are a very serious signal to potential lenders. These judgments show that the borrower is or has been in financial difficulties. Many lenders will not consider an application if your file shows judgments, so check before applying.
Court writs and court summons: also present difficulties. The writ may be a warrant, a prerogative writ, or a subpoena, but in all cases creates a prohibition for the affected person to perform certain actions. Traditional banks shy away from borrowers who have writs on their credit file. Similarly, a summons typically informs the affected person that a legal action has been started with them named as a claimant. This indicates that future claims against income or assets could be levied, increasing the security risk for the lender and limiting approval options.
An active bankruptcy on your file should be discharged if possible prior to your application. If you have the possibility to have the bankruptcy filing annulled, the bankruptcy no longer exists, and will be removed much earlier than in case of normal discharge.
Part IX Home Loans and Part X Proceedings
To prevent an actual bankruptcy filing, many people with financial problems instead choose to enter a Part IX agreement. This arrangement is more flexible than a bankruptcy and offers many options. In some cases, creditors may agree to accept a smaller sum than their actual balance to clear a debt. Repayments to your creditors are renegotiated to enable you to afford the payment out of normal income, and some creditors may accept the transfer of property to the creditors in satisfaction of the debt. If required, repayment can be temporarily halted by a Part IX agreement. Finally, holding a Part IX agreement instead of a bankruptcy allows banks more leeway in considering your loan application for approval.
Part X agreements are a further step, providing for an agreement between debtor and creditor. The debtor proposes a solution to the creditors, and a formal vote decides. This takes the resolution out of the hands of the court and provides a simpler solution.
Alternative Loan Types
For normally-qualified buyers, loans can be approved in some cases with reduced documentation or no documentation at all in terms of income verification. This is more difficult when the borrower has a negative credit history. Lenders specializing in bad credit have more flexibility than traditional banks when dealing with the self-employed. Often these borrowers cannot provide tax return data to prove income, especially when the business is a startup or has been officially registered for under two years.
In some extreme cases, a low document loan can be approved even if the borrower has serious credit issues such as mortgage arrears, unpaid defaults, or discharged bankruptcies. A borrower’s declaration or an accountant’s letter will be needed to verify income, and loans are typically capped at 60% of the property’s value. Up to 80% loans can be approved in some cases, but definitely with a higher interest rate.
No doc loans are somewhat more challenging with bad credit. See your specialist broker for assistance.
Part 9 Home Loan Interest Rates
Part 9 home loans typically carry a higher interest rate but the idea is to create a flexible and affordable loan. We don’t recommend that you carry this loan to full term and either do the lenders. Typically, these loans remain in place for 2 to 5 years until the borrower can shows good conduct on the loan. Once established the rates and options change for the better. This financing model should be used as a recovery device instead. Take the higher interest loan in the short term, and then plan on refinancing the loan to a traditional lender in the two to three year time frame. This allows the borrower enough time to repay any open debts, correct the negative items on your credit file, and keep your new loan payments current.
Once you’ve cleared all of the negative issues, refinance into a twenty-five to thirty year fixed rate mortgage to provide more security and a lower repayment.
Many borrowers will use part of the loan proceeds to provide debt consolidation. The benefit here is that combining higher-interest rate debts into one lower-interest rate loan will allow much faster repayment at a lower overall cost. Consolidation can limit any ongoing damage to your credit file and stop a possible repossession action by your mortgage lender.
Conversely, taking additional funds for consolidation may increase the overall rate on your home loan. These loans may already carry an increased exit fee for the first two to three years, so getting the refinancing done early may be impossible.
Borrowers with bad credit will have trouble qualifying for a home equity loan. Banks already view an equity release as a higher risk proposition, and a negative credit score only reinforces this point. Additional discussion with your lender or with a professional broker can help to determine if you have potential for this type of approval.
If you already own property and you have equity built up, private financing should also be considered as an option. Specialized brokers can assist in finding a private lender who will work with bad credit loans.
As mentioned above, the general plan is to take a specialized loan in the short term, and to refinance a short time later to a prime lender and a regular loan. If you are unable to do this, there are more alternative approaches. Consider refinancing to a different non-conforming lender with a lower rate, and then later refinancing a second time to a prime lender.