A bad credit rating can make it difficult to get a home loan, but it’s not just those who struggle to manage their finances that can end up with bad credit. Plenty of circumstances could affect your credit history; from identity theft, sickness and divorce, to simply forgetting to redirect your bills when moving house, resulting in missed or late payments.
If you’re in this situation, there are things you can do to improve your chances of buying a home. Whether it’s ensuring your credit history is accurate or looking for alternative lenders that take your individual circumstances into consideration, options are available to help you fulfil your dream of becoming a home owner. Here are five tips to get you started.
1. Get on top of your credit report
The first thing you should do when faced with bad credit is get a copy of your credit report to make sure you are aware of all the negative records you might have against your name.
Having a copy of your report will help you make plans to ensure your ability to obtain credit is improved in the future. Overdue debts remain on your file for five years, but the credit file will be updated if you’ve paid out the balance of a debt. In addition, many lenders will want to know what actions you’ve taken to address your past credit mishaps, so it’s best to ensure that any defaults are paid off and that they can see you have made good progress.
If any information is inaccurate, make a request to have it corrected so it doesn’t continue to affect your home-buying plans. Speak to the credit reporting agency, as well as your credit provider if you believe there’s been an error.
2. Shop around
Your credit file may have resulted in a declined loan with the first lender you tried, but there are always others you can approach; each lender has a different criteria for home loan applicants. If one lender didn’t look on your circumstances favourably, another may take a different view.
While shopping around is a wise option, it’s important to remember that multiple credit applications in a short time frame can be detrimental to your credit score. So, it’s best to be cautious and only apply for one type of credit at a time. For example, if you're after a mortgage, wait until later to get yourself a car loan. Attempting to secure too much credit at one time can give lenders the impression that you're desperate for cash or not prepared to handle your debts responsibly.
3. Consider lenders with alternative scoring model or credit assessments
Many traditional lenders use an automated credit-scoring model to determine whether or not your home loan should be approved. A specialist lender like Pepper Money will look at your individual application and consider your current financial situation in addition to your credit report.
Of course, non-bank and specialist lenders must still comply with the consumer credit law including around responsible lending practices.
4. Consider an alternative to Lenders Mortgage Insurance (LMI)
When you buy a home with a deposit of less than 20 per cent, you may find you need to pay for Lenders Mortgage Insurance (LMI). LMI providers have their own lending criteria to evaluate a loan but they will consider your application as carefully as a lender would. They could deny your application due to your credit history or income source, even when a lender has given you an approval.
Rather than using a third-party mortgage insurer, Pepper uses a Lender Protection Fee (LPF) which gives us the flexibility to assess loan applications without having to seek approval from LMI providers.
5. Look for flexible lending products to fit your circumstances
While the major banks tend to have a rigid loan assessment criteria, a lender like Pepper can offer a different approach to home loan applications, and will consider your application on its individual merits. If your credit history is the only thing holding you back, you may be able to get a mortgage from a more flexible lending product.
Been turned down by a lender? If you're looking to purchase a home and are dealing with an impaired credit rating, read more about Pepper Money's lending criteria or speak to a Lending Specialist to see how we may be able to help. Talk to us today on 13 73 77 or contact your Pepper Money broker.