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Bad credit home loans

Find out what you need to do to improve your credit score and get a home loan.

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Getting a home loan is tougher when you have bad credit. Here’s what you need to do to find the right loan and increase your chances of getting approved.

What is a bad credit home loan?

At their core, bad credit home loans are similar to regular home loans: 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 home loan 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. This means you may need to save a deposit greater than 20% of your property’s value.

Understand how you ended up with bad credit

Start by understanding the causes behind your credit problems. You may find your credit score affected 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 impact as unpaid bills.
  • Have applied for credit too often. It is a general rule of thumb that you should only make an enquiry for credit once every six 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 home loan with bad credit and get approved

When applying for a home loan with bad credit, there are a number of things borrowers can do to help their chances:

1. Get a copy of your credit report

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 a free copy of your credit report 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 report 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 in New Zealand specialise in bad credit home loans. These lenders look at your credit report and take into account bad credit resulting out of a lifestyle change, such as divorce or illness. They 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.

5. Don’t apply for too many loans in one space of time

Your credit file lists all previous enquiries for credit, including past loan applications. Be careful who you apply for a home loan with if you already have bad credit. Too many enquiries in the same space of time can present another red flag to prospective lenders.

6. Tell your lender about your bad credit listings honestly

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 capacity.

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 a bad credit home loan

Mortgage brokers are qualified experts who can help you find a mortgage. They specialise 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 organise your application to maximise your chances of approval.

A broker’s service is usually free because they receive a commission from your lender, not from you.

Learn more about how mortgage brokers can help you

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