How to apply for a home loan with bad credit

Australian lenders are compelled by law to be responsible about who they loan money to. If they believe that you won’t be able to repay a loan, they tend to reject your loan application. For example, if you apply for a home loan with a bad credit history due to overdue payments or defaults, the lender will likely reject your application. 

However, some lenders do consider other aspects of your application that may compensate for a bad credit history or indicate your borrowing behaviour has changed. These other factors include steps to repay past debts, your income, your other assets, expenses, employment, how much you wish to borrow and how much of the deposit you’re willing to cover. 

How does a bad credit history affect a future home loan?

If you miss paying a bill, credit card, or your mortgage, it will be recorded on your credit file, which credit reporting agencies like Equifax maintain. Here are some things to consider:  

• If you have missed payments towards your existing mortgage in the last six months, your credit score is likely to be affected. Most lenders will not even consider your application if you have missed a single repayment. 
• While applying for a home loan with bad credit, you need to look at your past credit history with that lender especially. If you’ve had problems with the lender in the past, they’re less likely to approve your loan application. 
• You might have a bad credit score if you have too many debts compared to your total income. If your total income is lower than your total liabilities, lenders may reject your home loan application. 

What is a bad credit home loan? 

If you’re able to prove that you’ll make regular repayments, some lenders are willing to overlook your poor credit history and approve your home loan application. There are also loans that specially cater to people who have a bad credit history. 

It’s worth remembering that bad credit home loans often include additional criteria or higher interest rates, in exchange for the risk they take on as a lender. It’s important to make sure any loan is affordable and seek independent advice if unsure. 

How to get a home loan with bad credit

There are a few steps you can take to improve your chances of getting a home loan with bad credit: 

Increase your deposit

When you apply for a home loan with bad credit, it may help to have a deposit of 20 per cent of the property price. If you borrow more than 80 per cent of the home’s cost, you need to get two approvals:approval of the lender and the mortgage insurer who protects the lender if you default the mortgage. Saving a large deposit can also show your prospective lender that you have tried to repair past credit behaviour.. 

Find a lender willing to look past the credit score 

Many lenders tend to reject a loan as soon as they determine that you have a bad credit score. You need to evaluate multiple lenders to find one that looks beyond your credit score. 

Go guarantor

Having someone to guarantee your home loan can sometimes help to get a home loan as it reduces the risk from the lender’s point of view. However, if you default on your loan, your guarantor’s property could be put in jeopardy. It may help to get advice before going down this path. 

Where to get a mortgage with bad credit?

If you’re looking for a home loan with bad credit, it’s important to have access to lender information that fits your needs. RateCity lists various home loan options, including lenders that offer home loans for bad credit.

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