It’s hard to get approved for a home loan if you have bad credit, but there are steps you can take to improve your chances.
If you have a bad credit rating, getting a home loan could be difficult. However, there are steps you can take to give yourself the best chance of being approved.
1. Apply with a mortgage lender that doesn’t use a credit score
Most lenders use a computerized system called a credit score to assess your home loan application, says Kim Wight, personal mortgage advisor at Smartline.
“This means the data collected in your app is given a rating or score and if the computer rates you as a bad risk, the app is denied before a real person has a chance to look at the app or hear your story to find out why you’ve had credit problems in the past. In other words, ‘the computer says no,'” she explains.
“By applying to a lender that does not use credit scoring, your application – and the reason for your past credit problems – will be assessed by a real person, who can assess your past and present personal circumstances and use these information to make a decision on your application; it may be a case of ‘the human says yes’.”
2. Avoid Lenders Mortgage Insurance (LMI)
When applying for a home loan, there are two approvals that must be sought if you are borrowing more than 80% of the property’s value. One comes from the lender and the other from the mortgage insurer, which protects the lender in the event of default.
“By having funds available to cover the 20% deposit and other costs such as stamp duty and legal fees, you avoid having your application assessed by the mortgage insurer and you have a better chance of the loan being approved,” says Wight.
3. Demonstrate that you have improved your financial situation
“If you’ve had issues in the past, you need to show that you’re now on the right track by making sure all current financial commitments are paid on time,” says Wight.
“This not only includes your loans and credit cards, but also your rent and utilities. Proof of regular savings will also strengthen your claim.”
4. Go to a specialized lender
Depending on the severity of your bad credit history, traditional lenders may not be able to help you, but there are specialist lenders in the market who price their products based on the element of risk.
“The interest rate is usually higher,” admits Wight, “but people usually only stay in these products long enough for their credit to improve, and then they refinance at a lower rate.”
5. Seek professional advice regarding your credit report
“There are a number of specialist credit repair agencies who may be able to help you clean up your credit report. It is advisable to speak with them or with a lawyer to investigate whether it is possible that the negative entries in your report are removed,” says Wight.
6. Shop around – but only in principle
It’s important that you don’t apply to many lenders when shopping for a home loan, because each time you apply, it gets recorded in your credit report. “If lender after lender denies your application, it will further impact your credit report,” Wight says.
“Initially, a mortgage broker can assess which lender is most likely to approve your loan application and what interest rate and fees may apply. It is important that you tell your broker the full story and honest about why you encountered credit problems so that they can resolve the issues with the lender’s credit department.”