A bankruptcy you filed a few years ago, medical bills you couldn’t afford or even just a handful of late student loan payments can come back to haunt you when it’s time to buy a new house. While bad credit makes applying for a mortgage a little trickier, it doesn’t have to make it impossible.
Although your options may be more limited if you have a poor credit score, some brokers and lenders are willing to work with borrowers of all credit scores. Before lodging an application, consider getting pre-approved to find out if you’re eligible.
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At their core, bad credit mortgages are similar to regular mortgages: you save a deposit, borrow an amount of money, then pay it back with interest. But because you have poor credit the loan will be a little more restricted or have higher fees and charges.
A typical bad credit mortgage has:
Higher interest rates. Loans for credit-impaired borrowers are usually much higher than the most competitive loan rates.
Higher fees. Ongoing and upfront mortgage fees are far more common with bad credit loans.
Lower LVR. The loan-to-value ratio (LVR) is the amount of the loan against the value of the home. A lower LVR affects your borrowing power. This means you may need to save a deposit greater than 20% of your property’s value.
What is the minimum credit score that I need to get a home loan?
When getting a mortgage, your credit score is an essential part of the decision-making process for lenders, if not the most important. Typically, credit scores range from 300 to 900, and lenders look for good scores of 700 or above. You can find lenders that provide mortgages to borrowers with scores below 700, but your rate and terms won’t be favorable.
The type of mortgage you’re applying for will also affect the minimum credit score requirements.
Understand how you ended up with bad credit
Start by understanding the causes behind your credit problems. You may find your credit history damaged if you:
Have unpaid bills. Make sure you keep your payments up to date and on time.
Have been declined for a loan. If you have recently been declined a home loan this will be recorded on your credit file. Many lenders will see this as a sign of impaired credit.
Made late payments. Late payments will also affect your credit history but they will not have as much of an effect as unpaid bills.
Have applied for credit too often. It is a general rule of thumb that you should only make an inquiry for credit once every 6 months. Any more than this could raise a red flag to lenders.
Have been declared bankrupt. If you have been declared bankrupt then you will have a bad credit rating that will stay on your credit rating for seven years.
8 tips to apply for a mortgage with bad credit and get approved
When applying for a mortgage with bad credit, there are a number of things borrowers can do to help their chances:
1. Get a copy of your credit file
All of your prospective home loan lenders will have a close look at your credit history before granting you a home loan, so you want to be able to discuss the negative marks on your credit file with confidence. You can get one free copy of your credit file each year. This will help keep you aware of any negative listings you might be able to fight against using a credit repair service.
2. Take steps to settle any outstanding debts
New lenders will want to know what you’ve done to address your past credit mishaps, so ensure that any defaults are paid and you do the right thing by your previous creditors.
3. See if a credit repair service can help you
Some bad credit listings, if placed on your file without proper adherence to the relevant laws, can be removed from your file. A credit repair specialist can help you in this regard. Removing negative listings from your credit file can help you apply for a regular home loan, avoiding the higher fees and interest rates of a bad credit home loan.
4. Apply for a loan with a specialist lender who looks beyond the numbers
Certain lenders specialize in bad credit mortgages. These lenders look at your credit file and take into account that bad credit can result out of a lifestyle change, such as divorce or illness, and will take into account your income and other factors to still grant you a loan, even if you’re a discharged bankrupt or have negative listings on your file. You can leverage your employment history and your record of receiving a steady income to help your case.
5. Don’t apply for too many loans in one space of time
Your credit file includes all previous inquiries for credit, which includes past loan applications. Be careful who you apply for a mortgage with if you already have bad credit. Too many inquiries in the same space of time can present another red flag to prospective lenders.
6. Tell your lender about your bad credit listings honestly
As with every lender, a non-conforming lender will look at all the red flags in your credit history. However, they will also ask for an explanation regarding each entry, and you will have to be thorough in the details you provide. If you try to hide something, you won’t improve your credit rating. You will simply make the lender more suspicious. This may lead to your application being declined on the grounds that you were not being transparent enough or fully honest about your circumstances.
7. Avoid applying with a spouse who has bad credit if you can
If your partner is the one with bad credit, sometimes you can avoid rejection and the higher interest rates of a bad credit loan by applying as a single applicant. Just keep in mind that applying solo will reduce your borrowing power.
8. Eliminate your other debts to make your file look better
When your lender looks at your application, they’ll take into account all of your current credit accounts, including credit cards and personal loans. If you can pay these off and close them before applying it’ll be one less factor that will work against you when your lender decides whether to approve or reject you.
How mortgage brokers can help you find mortgage with bad credit
Mortgage brokers are qualified experts who can help you find a mortgage. They specialize in helping borrowers in unique circumstances who have difficulty qualifying for regular home loans. This includes borrowers with bad credit histories. Brokers can help you find lenders for your situation and help you organize your application to maximize your chances of approval.
A broker’s service is usually free because they receive a commission from your lender, not from you.
Compare mortgage brokers
Bad credit case studies
Martha's Post-Divorce Triumph
Martha was married to her husband Travis for 30 years.
Unfortunately, they separated and later divorced over the course of 2 years. During these 2 years, the stress of the divorce coupled with the loss of a second income when Travis moved out meant that Martha fell behind on a number of credit card payments and bills.
After the divorce and the sale of the family home, Martha wanted to purchase a small apartment for her to live in and be near her children and grandchildren.
Having a senior role at her job meant that her income was high — making her a model applicant — but her credit file showed a very different story.
Martha got a copy of her credit file, and using a credit repair service was able to remove one of the 4 listings from it.
She then approached a specialist lender who could see that apart from the 3 listings on her credit file during her divorce period, the rest of her file was spotless.
Three weeks later Martha had pre-approval for a loan and was able to purchase the apartment she wanted.
Peter and Mary
Peter and Mary had been paying their home off for the past 20 years. Unfortunately, Peter fell ill and had to take 4 months off work. For the first 2 months they were able to cover their mortgage payments on time using Mary’s salary and their savings.
It was after those 2 months that the couple started to struggle. Bills were piling up and while they were able to keep up with their mortgage payments, several other bills were sent to a collection agency.
Realizing they needed to figure something out quickly, Peter and Mary talked with a lender and were able to refinance their home. The lender was willing to overlook the recent strikes on their credit scores because of Peter’s illness, and they were able to borrow against the equity in their home so that they could pay their bills on time until Peter was able to go back to work.
If you’re having trouble getting a mortgage because of bad credit, you do have options. Consider these:
Borrow from family. If you’re fortunate enough, you might be able to borrow money from a family member with better rates than a bank might provide.
Improve your credit. Taking out a loan with poor a rate and terms isn’t always advisable. Take the time to improve your credit score and purchase a home in the future.
Larger down payment. The larger your down payment, the better your chances of getting a mortgage.
Cosigner. If you have someone with good credit who is willing to cosign on your mortgage, you might qualify.
Buying a new home is stressful, and trying to get a mortgage when you have bad credit can make it even more so. However, a bad credit score doesn’t have to be the end of your new-home dreams. If you spend a couple of months working on improving your credit, find a lender who is willing to listen to your side of the story, and leverage your steady employment history it’s still possible to find a mortgage that works for you.
Different lenders will have different credit score ranges they’re willing to consider, but in general a credit score below 670 is considered fair, which means you might have a higher interest rate on a mortgage, and a score below 580 is considered poor.
Not if you order your report from an authorized credit bureau.
Marc Terrano is the lead publisher of Points Finder and a co-host of the Pocket Money podcast. He was previously a writer and publisher for home loans at Finder. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help Australians get the best value for their money.
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