Bad credit doesn't mean you can't borrow

When life gives you lemons, make lemonade. Although I commend anyone with this level of optimism (mine was lost in a dark pit of despair many years ago), trying to get back on your feet after being hit with financial hard knocks is not just a matter of “starting over”, especially when it comes to getting approved for a home loan.

You may well have made the decision to change your spending habits and get your financials back in order but your credit file records these black marks and they remain there for every bank to hold against you when you apply for a home loan.

Whether it’s through marital separation, job loss or simply living a little beyond on your means with that amazing new credit card, defaulting on your liabilities can happen to even the savviest investor.

In fact, the Australian Retail Credit Association recently found that roughly 14 per cent of Australians have a default or other black mark on their credit file but most people don’t know that they have a “bad” credit history until it comes time to apply for a loan. Let’s hold off adding yet another unnecessary enquiry to your credit file, shall we?

How do I know if I have bad credit?
Bad credit can include:
•    Missed home loan repayments
•    Defaults, bankruptcy, judgments, court writs and having too many credit enquiries on your file
•    Credit history with a particular lender
•    Unpaid bills or tax
•    If you own a company facing financial trouble, receivership or liquidation
•    Excessive unsecured personal debt compared to your current income and asset position

Since March, Veda Advantage began collecting your repayment history for the last two years as part of your credit file. That means if you already had a shady credit history, banks now have more fodder than ever to decline your application.

For some banks, your credit file is the ultimate tool when assessing your worthiness as a borrower but there are lenders that take a more balanced approach.

A specialist mortgage broker can even recommend lenders that don’t check your credit score at all!

Will I always have to go with a non-conforming lender?

Most banks will take a default, judgment or your discharged bankrupt status on face value and will rarely look any further into the details surrounding the black mark.

If there’s one thing I’ve learned in my years as a broker it’s that the banks can change their lending policy at a whim.

Their decision to lend to someone that’s a little outside of their lending policy really comes down to the banks level of risk at the time of your application.

For example, your mate could have gotten approved six months ago but it doesn’t mean that you will get approved with the same bank as well.

Alternatively, your broker may suggest a non-conforming lender, who’ll ask you to provide details on the nature and amount of any defaults on your credit file as well as the reasons behind judgments and even bankruptcy.

Providing evidence that you are paying your bills on time and the default or judgment was a one-off may be just enough to get you loan over the line.

Even with paid defaults amounting to $3,000, you may be able borrow up to 80 per cent of the property value with a prime lender, up to 90 per cent of the property value with a specialist lender or up to 100 per cent of the property value with a guarantor loan with the right lender.

Will I pay a higher interest rate?

If you are deemed to have a bad credit history, then your ability to get approved and the amount of interest you’ll pay will be determined by your loan-to-value ratio (LVR):

For home loans less than 80 per cent LVR, you may qualify for the same interest rate as someone who has no adverse listing on their credit file.

Of course, every situation is different and, with the right broker, there may still be great interest rates available to you.