Getting a home loan after bankruptcy

Bankruptcy can be a deeply challenging experience. But it doesn’t have to spell the end of being able to buy a home.

Sometimes, for a whole variety of reasons, we may find ourselves overwhelmed by debt. When that happens, bankruptcy can seem like a way out of a very stressful position, but it can also have some lasting financial effects. So what are the rules around getting a home loan after bankruptcy? Here’s what you need to know.

What is bankruptcy?

Bankruptcy is a legal process that essentially means declaring you can’t pay your debts. In that sense, bankruptcy can offer a level of relief, as it releases you from most debts – though you may still owe money on certain types of debts such as government-funded student loans.

For the most part, bankruptcy offers a fresh start. It’s certainly not a quick fix though. The Australian Financial Security Authority (AFSA), which oversees bankruptcies, advises that bankruptcy normally lasts for three years and a day. During this time, strict conditions apply. A trustee will be appointed to manage your bankruptcy, and if you earn over a set amount (currently around $60,000 if you have no dependents) after tax, you may need to make payments to the trustee. In addition, you can face restrictions around leaving Australia.

Longer term, bankruptcy can also impact your ability to get approval for most types of credit, including a home loan.

How will home loan lenders know I’m bankrupt?

When you’re declared bankrupt, your name is listed permanently on the National Personal Insolvency Index (NPII). This is a public register that shows personal details such as your name, date of birth and address, along with whether you’re still bankrupt or have been discharged from your bankruptcy. While it’s possible to request that some details such as your address are hidden from public view if necessary for safety reasons, your name and date of birth will always remain on the NPII, where they can be seen by lenders if they check the register.

Your credit record can also disclose details of bankruptcy. Credit reporting agencies keep a record of bankruptcy for five years from the date you become bankrupt, or two years from when your bankruptcy ends, whichever is later.

Getting a home loan after bankruptcy

During the course of a bankruptcy, it’s a criminal offence to apply for more debt in many circumstances. If you want to make purchases worth over a set amount (currently just over $6,000) on credit or by using a cheque, you need to make it clear to the lender that you’re currently bankrupt. This means you almost certainly won’t be able to access a home loan during your bankruptcy.

However, bankruptcy doesn’t have to stop you from buying a home in the future. AFSA explains that after your bankruptcy has ended, there is no restriction on applying for loans or credit. It’s up to the lender to decide if it will approve your loan application.

Buying a house after bankruptcy

For most of us, buying a home means taking out a home loan, and if you’ve been declared bankrupt in the past, it can take time to rebuild your finances so you can confidently apply for a loan. AFSA points out that learning to budget and save can “go a long way towards helping you build a new life”. Your ability to land a home loan can also depend on which lender you choose. Your bankruptcy will typically remain on your credit report for two years after it ends, so it could be worth spending that time growing your savings and improving your credit history, rather than applying for a home loan straight away.

Regardless of when you apply, most lenders will either check the NPII or ask if you have been declared bankrupt in the past, and some won’t approve a home loan even if your bankruptcy is behind you.

However, there are a few specialist lenders that may be more likely to offer home loans to people who have been bankrupt in the past. Whether or not a particular lender will approve your home loan application will depend on your circumstances, including your credit and savings history following the end of your bankruptcy.

The drawback of using a specialist lender is that you may have to jump through extra hoops, and it can be more expensive than a home loan from a traditional lender. This all reflects the fact that from a lender’s perspective, a track record of bankruptcy poses a higher risk of missed repayments or defaults in future. As a guide, you may need to:

• Pay a larger deposit
• Pay higher upfront and ongoing fees
• Pay a higher loan interest rate compared to a mainstream lender
• Provide additional paperwork, such as a written explanation of your credit circumstances or a letter from your accountant.

While a loan from a specialist lender may cost you more, it can be one option to consider if you are keen to own your own home. After several years of regularly making loan repayments, it may be possible to refinance your home loan with a traditional lender, and potentially save money with a lower rate. You can compare home loans with Canstar.

Should I apply for a home loan after bankruptcy?

Whether or not to apply for a home loan is a personal decision, but bear in mind that if you have been through the bankruptcy wringer, it pays to choose your home loan lender with care. You may want to seek professional financial advice before jumping in, to help ensure the lender and loan you choose are suitable for your circumstances. Making multiple loan applications and having them knocked back will impact your credit record, and potentially lower your credit score. So it could also be worth talking to a lender or mortgage broker before rushing in to make an application.

It’s also important to think about whether you are ready to take on a significant debt. You need to be sure you can comfortably manage the repayments – and that you’re not putting yourself back in a position where you’re struggling with debt. If you are struggling with debt or bankruptcy-related issues and need advice, you can contact the National Debt Helpline on 1800 007 007 for free, confidential financial counselling.

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