Can you get a home loan if you have bad credit?

If you have a ‘bad’ credit history, can you get approved for a home loan? And is it a good idea?

Having bad credit can make it more difficult and riskier to get a loan compared to someone with ‘good’ credit. It can also be more expensive.

Can I 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. However, this will depend on the other aspects of your application. Your credit history is just one factor lenders consider when assessing your home loan application. Other factors such as your income, expenses, employment, how much you want to borrow and how much of a deposit you have will also be taken into account.

In Australia, lenders are legally required to lend money responsibly. This means they cannot give you a loan if they think you won’t be able to make the repayments. For example, lenders can reject your loan application if you have defaults or overdue payments listed on your credit report that suggest you may not be able to meet the repayments on the loan you’re applying for now.

If you have a bad credit history, some ‘traditional’ lenders (such as banks and credit unions) may not consider you for a loan. However, it’s worth noting that lenders won’t necessarily treat all defaults the same way. For example, lenders may be more lenient if the default is only for a small amount, if you have paid the default or if it is an old (rather than new) default.

There are also specialist lenders who offer ‘bad credit home loans’. Specialist lenders may be more willing to lend to those with impaired credit. However, it’s important to be fully across the costs and other terms and conditions that may apply.

What is a bad credit home loan?

Bad credit home loans are simply home loans designed for those with poor credit. They are typically offered by specialist lenders, also known as non-conforming lenders. But there is often a catch – bad credit home loans typically charge higher interest rates. This is to account for a higher risk of default.

Over the life of a home loan – typically 25 or 30 years – even a slightly higher interest rate can make a big difference to how much it will cost you overall.

For this reason, bad credit home loans are usually intended to be a short- to medium-term solution, rather than a long-term fix. A borrower will typically seek to refinance to a standard home loan at a lower interest rate once their credit report has improved or negative information like overdue accounts and court judgments have dropped off their file.

Bad credit home loans can be riskier and more expensive than standard home loans, and you should research fees, interest rates, contract terms and risks that can apply with this in mind.

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 job security concerns being experienced during the coronavirus pandemic, and Australia’s economic recession. If you were to consider taking out a home loan and have your circumstances change unexpectedly, for example, there may be a possibility this could lead to mortgage stress, or increased risk of default, depending on your circumstances. When you take out a loan, you take on a degree of risk as a borrower and this can be high if you have a bad credit report and may be paying a higher interest rate as a result.

It may be better to wait until you have built up savings and have improved your credit history so you are 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, it’s important to tread carefully. Each time you apply for a loan, it is marked on your credit report. If you apply for multiple loans within a short space of time, it can signal that you are in credit stress, and may have a negative effect on your credit score. To this end, it’s important to do your research 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.

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.

For example, you may want to:

  • 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.

This article was reviewed by our Sub-editor Jacqueline Belesky and Finance Editor Sean Callery before it was published, as part of our fact-checking process.

Main image source: GaudiLab (Shutterstock). 

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