Bad credit home loans

What is a bad credit home loan?

A bad credit home loan is designed for borrowers with poor credit, usually offered by specialist lenders. They often come with higher interest rates and fees, making them more expensive than standard loans. Because of this, they’re generally used as a short- to medium-term option until you can refinance to a lower-rate loan once your credit improves.

Can you get a home loan with bad credit?

It may be possible to get approved for a home loan if you have a bad credit history, as your credit history is just one part of the assessment. Lenders also consider factors like your income, expenses, employment, how much you want to borrow and your deposit size to determine your eligibility. They need to be confident you can meet repayments without falling into further financial hardship.

Lenders don’t treat all defaults the same way. Traditional lenders, such as banks and credit unions, may be stricter, but some may still consider applicants with small, old (rather than new), or already paid defaults. However, you may need a larger deposit and could face higher interest rates.

Some specialist lenders offer bad credit home loans and may be more willing to approve borrowers with impaired credit. However, these loans can be more expensive and carry additional risks, so it’s important to understand the costs and terms before applying.

Should I apply for a home loan if I have bad credit?

If you have a bad credit history, it’s important to carefully consider whether applying for a home loan is the most prudent thing to do. This may be particularly important for some people given the high cost of living.
If you take out a home loan and your situation changes, you could face mortgage stress or risk default. Taking on a loan involves some degree of risk as a borrower, which can be higher if you have a bad credit report and possibly paying a higher interest rate.

It may be better to wait until you have more savings and a better credit history. This puts you in a stronger position to apply for a home loan. For example, Bendigo Bank recommends that those with a bad credit history save up a deposit of at least 20% of the value of the house (or an 80% loan-to-value ratio) so you won’t need to be considered for lender’s mortgage insurance.

Once you are ready to apply for a loan, proceed carefully. Each application appears on your credit report. If you apply for several loans quickly, it can signal that you are in credit stress and may hurt your credit score. To this end, it’s important to research well before you apply.

You might want to get financial advice before committing to a loan. Free financial counselling is also available to support you if you need it, such as from the National Debt Helpline on 1800 007 007 or the Mob Strong Debt Helpline on 1800 808 488 (for Aboriginal and Torres Strait Islander peoples).

Are there any alternatives to bad credit home loans?

Rather than borrowing on their own, some borrowers may consider a guarantor home loan, where a family member, often a parent, uses their property as security for a loan. This lowers the lender’s risk and can increase your chances of approval. However, if you can’t meet your repayments, the guarantor may be required to cover the debt, which puts their asset at risk.

Another option is to speak to a mortgage broker. They can help you find lenders who may be willing to work with borrowers who have had past defaults but have since improved their financial position.

How can I improve my credit score?

If you have a poor credit score, there are steps you can take to help improve it. Although your credit score won’t change overnight, it can be improved over time as more positive information is added to your report and negative information gradually expires. Some tips are:

• Regularly check your credit report and make sure that the information in it is correct. If it is not, you can contact the credit reporting body and ask them to fix it. It’s free to update your credit report or remove an incorrect listing.
• Make sure you pay any repayments and bills on time. Setting up automatic payments could help with this. You might also like to use Canstar’s Budget Planner Calculator.
• Think carefully before applying for new credit or loan products and try to limit any applications you make, whenever possible.
• If appropriate, consider lowering the limit on any credit cards you have.