Improve your financial habits
A reason behind your bad credit history could be your financial habits needing a good review. Changing some habits will help you improve your credit rating and get you closer to getting your home loan.
If you find yourself having your account overdrawn or direct debits dishonoured it is important to start reversing this cycle. A consistent record of paying bills on time is a significant factor to show banks you are capable of repaying a home loan.
It is also important that your account shows a regular savings history. When applying for a loan with bad credit, be mindful of the fact that lenders will look at your current bank statements and assess you on these.
Set yourself a budget and aim to keep it. Start to plan for monthly expenses and look out for any ways you can reduce them. When you have a goal in mind, you are more likely to prioritise where your money goes.
Keep your credit card balances low and your credit score high
The closer you are to zero for your credit card balance, the better your account is seen by a lender. If you are using a number of credit cards, the bills can start to add up each month.
You can start to make more frequent payments from your bank account to offset a percentage of the total amount. Especially if you make a significant purchase, pay the bill before it comes. This way you will reduce your balance throughout the month.
Avoid applying for more credit than you need. Your credit report contains any credit applications made over the past 5 years. If you’ve had any applications rejected previously, this will stand out to the lender.
Credit application rejections stay on your credit report for between 2 to 7 years and although that could seem long, if a home is important to you, you will be able to wait it out. In the meantime, you have the time to start changing any bad habits and become more consistent with the good habits you are developing.
Show a reliable source of income
You will need proof of a stable job to show to your lender that you have the financial capacity to consistently pay off your payments. It is a legal requirement for lending institutions to not give you a home loan if you are unable to afford the loan repayments. Generally, being in a role for 12 months or more will demonstrate a reliable income, with some lenders requiring more or less.
If you have multiple smaller jobs, it does not help your eligibility for a loan, as most lenders look for one or two stable sources of income. In that case, you may need to approach the problem differently, by researching which lenders are more comfortable lending to those with alternative income sources, or by applying for a Low Doc Loan (designed for self-employed borrowers).
Unlike lenders that use an automated system for credit scoring, there are lenders that are specifically designed to assist you despite your credit history. They are able to assess your situation closely and be more flexible. It is likely to have higher interest rates initially but after improving your credit history, you will have more possibility to negotiate or switch to a lower interest rate.
You can compare home loans to look for a loan suited to your financial position using our website:
Changing your bad financial habits and ensuring you have a regular savings history will improve your ability to having your home loan approved. Show the lender that you are trying to improve your credit history and do not give up!