Bad credit mortgage brokers: what do you need to know?

If you are in the market for a home loan but have bad credit, a specialised mortgage broker may be able to assist you in reaching your goal. We explain what these kinds of brokers do and some factors and risks to bear in mind if you’re considering a bad credit home loan.

If you have a bad credit history, whether this is because of defaults or judgements on your credit report, a bankruptcy or a large number of credit applications, you may be concerned that your options for finding a home loan are limited. In this situation, you may be able to work with a mortgage broker who can help connect you with a lender that will meet your needs.

What is a bad credit home loan?

A bad credit home loan is a home loan that is specifically geared towards people with ‘black marks’ on their credit history, such as bankruptcies or defaults. It is similar to a standard home loan in the sense that you will typically need to save up for a deposit, then borrow an amount of money from a bank or lender, to be paid off over a set period of time with interest.

A bad credit home loan is likely to be different from a standard home loan in several key ways. For example, some brokers who specialise in bad credit home loans say that they may come with higher interest rates than loans offered by more mainstream lenders. It may also be the case that bad credit borrowers will need to borrow at  a lower loan-to-value ratio (LVR), depending on the lender. Although it is worth noting that some bad credit mortgage brokers may still potentially have access to lenders offering bad credit loans at higher LVRs.

Bad credit loans often have these kinds of conditions attached  because lenders assess the potential risk of each borrower before agreeing to loan them money. If they perceive you to be a high risk thanks to ‘black marks’ on your credit report, then they may only be willing to offer you a home loan under these strict conditions. It may also be the case that if a lender perceives you to be a high risk borrower, they may ask you to pay lenders mortgage insurance, which is an additional amount that is intended to protect them financially in the event that you are unable to meet your home loan repayments.

For these reasons, a bad credit home loan could be significantly more expensive than the loans available to borrowers with a better credit history. The higher regular repayments may even put further pressure on your finances, making it difficult to improve your credit score and your overall financial position. In addition, simply applying for a home loan can impact your credit score, particularly if your application is declined.

So, if you have bad credit, it’s important to carefully consider whether applying for a home loan is the right move. It could be a good idea to consider seeking professional advice from an independent financial adviser. Depending on your situation, you may also find it helpful to access free financial counselling, which is provided by the National Debt Helpline (NDH) on 1800 007 007. The NDH can connect you to an individual counsellor or relevant organisation near to you for further help.

If possible, it could be worth taking steps to improve your credit rating and applying for a home loan from a stronger overall position.  You may also be interested in finding out more about guarantor home loans.

Do mortgage brokers look at your credit score?

Mortgage brokers will look at your credit score when assessing your situation and deciding which home loan products they might recommend to you, as your credit score is an important part of the overall picture when it comes to your finances.

Your credit score is a number between zero and 1,000 (or sometimes 1,200, depending on the reporting agency) that lenders use when assessing your application for credit. There are five categories of credit score, and these are excellent, very good, average, fair and low.

Generally speaking, the higher your score, the more likely it is that you might be approved. Conversely, the lower the number, the more likely a lender might be to reject your loan application, or impose certain conditions on the loan.

If your credit score is low, you may find  working with a specialist broker helps you to find a suitable home loan, although there is no guarantee that you will be approved for a home loan just because you have spoken to a broker.

In certain circumstances a broker may also use information including your credit score as the basis for recommending that you do not apply for a loan until you are in a better financial position.

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What do bad credit mortgage brokers do?

A bad credit mortgage broker can assist you in your search for a home loan by recommending lenders who might be willing to work with you in your particular financial circumstances.

Generally speaking, a bad credit mortgage broker will ask you for the same information as a standard mortgage broker when assessing your application, which means you will need to provide details such as payslips, an overview of your assets and liabilities, and copies of your drivers licence, passport or other IDs.

In addition to this, it is likely that they will also ask for explanations for each ‘black mark’ on your credit report. This means you will likely need to be prepared to tell them:

• how the ‘black marks’ on your credit report occurred,
• what you did to overcome these issues, and
• why you are now in a more stable financial position.

Bad credit mortgage brokers may be able to assess your financial past and recommend a home loan provider who might be willing to lend to you in your circumstances. It is important, however, that you be open and honest about your finances, so a broker can most effectively help you.

How do you choose a bad credit mortgage broker?

When choosing to work with any mortgage broker, it is important to remember that while brokers work with a panel of different lenders, who will have various different home loan options available, they will not have access to every lender on the market. It is therefore important to do some preliminary research yourself, in order to ensure that the loan or loans they recommend line up with what you may be looking for.

Similarly, it is important to make sure that your mortgage broker is licensed. Brokers in Australia are bound by a statutory ‘best interests duty’, which means that they must only recommend home loan products they believe to be in your best interest, given your capacity to repay a loan. You can ask them directly for details about their credit licence, or contact a professional body such as the Finance Brokers Association of Australia Limited (FBAA) or the Mortgage & Finance Association of Australia (MFAA), who may be able to assist you in finding out if your broker is licensed, or connecting you with one who is.

If you’re wondering whether a broker might be a good fit for you, there are a number of questions you can ask a mortgage broker to get a sense of what they are like.

Can I buy a house with a credit score under 500?

A credit score of below 500 would generally be considered ‘fair’, ‘low’ or just ‘average’ by credit reporting agencies in Australia, and this could potentially make it more challenging to be approved for a home loan. A score on the lower end of the range like this could mean that some lenders might consider you too risky. Others might offer you a loan with a higher interest rate than they would a borrower with a higher credit score, or might be willing to loan you less money.

In these circumstances, a mortgage broker who specialises in bad credit may be able to help by recommending a lender who works with borrowers with a low credit score.

What if you have bad credit and can’t get a home loan?

If your credit is too low to be approved for a home loan, all is not lost. Your credit score is not set in place forever and it can increase over time with careful management of your finances. According to Moneysmart, if your credit score is low, you can take steps to improve it, and some things you can do are:

• lower your credit card limit
• limit how many applications you make for credit
• pay your rent or mortgage on time
• pay your utility bills on time
• pay your credit card on time each month if you have one, either in full or repaying more than the minimum required payment.

As you do these things, your credit score will likely start to improve, and you may have a higher success rate the next time you apply for a loan. With a higher credit score, you may find it easier to find a mortgage broker who is able to work with you and lenders to find a suitable home loan.

Which lender is best for bad credit?

Generally speaking, major banks in Australia may not offer bad credit home loans, but there are a number of specialist lenders who may be able to assist you, depending on your individual circumstances. The question of which lender is ‘best’ is subjective, and the answer will come down to what kind of terms the lender is willing to offer you, including the interest rate they will charge and the amount of money they will lend. For this reason, a mortgage broker who specialises in bad credit home loans may be able to recommend a lender who can assist you in your particular circumstances.

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