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. Save a larger home deposit to avoid paying a risk fee
There are lenders who will consider a deposit of less than 20 per cent, but you may find you need to pay an additional risk fee – a one-off, extra fee payable by you as a borrower – to offset the risk associated with loans of a higher Loan to Value Ratio or to protect the Lender if you’re unable to meet your home loan repayments.
So, whilst it can be challenging to save a larger home deposit when paying rent and other bills, it is always a good idea to try set aside at least a 20 per cent deposit. Not only does this help to ensure that you have enough money to cover the additional fees and charges associated with your loan, but it means you can avoid paying a risk fee.
Sticking to a structured savings plan can help you to save a larger home deposit.
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 Money offers 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.
If you’re looking to purchase a home and are dealing with an imperfect credit history, we may be able to help. Learn more about Pepper Money’s bad credit home loan options by talking to one of our Lending Specialists on 13 73 77, or enquire online.
Alternatively, to get you started, find out how much you could possibly borrow using our borrowing power calculator.
See how we can help if a bad credit history has hindered your home loan aspirations.
This article provides you with factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. Neither Pepper nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in this article. For information about whether a Pepper loan may be suitable for you, call Pepper on 13 73 77 or speak to an accredited Pepper Money broker.
All applications are subject to the credit provider’s credit assessment and loan eligibility criteria. Terms, conditions, fees and charges apply. Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
©Pepper Money Limited ABN 55 094 317 665; AFSL 286655; Australian Credit Licence 286655 (“Pepper”). All rights reserved. Pepper is the servicer of home loans provided by Pepper Finance Corporation Limited ABN 51 094 317 647. Pepper Asset Finance Pty Limited ACN 165 183 317 Australian Credit Licence 458899 is the credit provider for asset finance loans.