If you’re looking to get a mortgage, but you have a bad credit rating and your loan application has been rejected by traditional lenders, the good news is that you can still obtain a home loan. Some specialist or non-conforming lenders will grant a mortgage to customers with a bad credit history.
Bad credit home loans are like regular home loans except that they have short-medium repayment periods and higher interest rates because of the higher risk of lending money to someone who has a bad credit history.
Here’s how you can get a mortgage with bad credit:
1. Understand your credit score and history
To determine your eligibility for a home loan, the type of mortgage you receive, the pricing and down payment, lenders will look at your credit score and history, income and personal circumstances. For the loan program, you can either get a conventional or an FHA-type home loan. For the cost, the lower your credit score is, the higher the interest rate and charges will be, and the higher you earn, the more you can borrow.
If you have a credit score below 620, your credit history is likely to include the following:
- Defaults or late payments
- Balances on closed accounts
- Applying regularly or being rejected for other loans
- Short sale
- Debt agreements
- Debt judgements
- Court writs
- Mortgage arrears
A non-conforming lender will look at your credit report, but they’ll also ask you to explain the reasons behind each entry. It’s your job to be honest and transparent about your situation. You’ll also want to clearly show you can make loan repayments, to improve the chances of having your application approved.
2. Applying to a specialist or non-conforming lender who doesn’t use credit scoring
Most lenders use a computer that scores your level of risk, which could lead to a rejection. If you apply with a specialist or non-conforming lender who doesn’t use credit scoring, your loan application and bad credit history will be evaluated by the lender themselves, taking into account your personal circumstances.
Specialist or non-conforming lenders price their mortgage products depending on the level of risk. A high-risk customer such as someone with bad credit will be offered a high interest-rate loan. But if their financial situation improves, they can refinance to a lower interest-rate loan and then refinance to a major lender if they choose.
3. Avoiding mortgage insurance and investor overlays
If you can pay a 20% deposit, stamp duty and legal fees, a mortgage insurer won’t need to assess your application and the loan is more likely to be approved.
Investor overlays are when guidelines and/or pricing are adjusted to suit the lender to protect them from future losses through mortgages they’ve approved. However, overlays limit a person’s ability to borrow through expensive fees, a low purchase price, or a low debt ratio. So choose a lender who has minimal overlays.
4. Demonstrating that your financial situation has improved
Showing that you have been paying other loans, credit card debts, rent and bills by the due date and that you also have regular savings can boost your chances of getting a loan.
5. Repairing your credit report and consolidating all debts
A specialist credit repair agency can offer assistance in removing bad credit entries from your credit report. This way, when you apply for a mortgage, the lender won’t know about your financial difficulties and will approve your application as though you have good credit.
With a debt consolidation loan, you can consolidate all your debts into a single loan and reduce your repayments. This can improve your credit history and help you get a loan approval.
6. Shopping around in principle
When shopping around for a mortgage, don’t apply to a lot of lenders, as each application will be recorded in your credit report, and every rejection will only hurt your credit score further.
You can first speak to a mortgage broker who can tell you which lender to apply to and what the interest rate and applicable charges are. Also, explain to them why you have bad credit so they can inform the lender. When meeting with the lender, show them relevant documents regarding your credit history to increase your chances of having your loan application approved.