These loans are generally for borrowers who may have an adverse credit history, existing home loan arrears, credit card or personal loan arrears or defaults, too many debts and are finding it difficult to consolidate or have been declined by another lender.
Lenders are wary of those who do not pay their defaults or those who keep having ongoing credit problems.
What is bad credit history?
Your bad credit history will place you in one or more of the following categories:
Small paid default: If you have a small default for less than $500 and it has been paid more than six months ago then you borrow up to 90% and in some cases 95% LVR (of the property value).
More than one small paid default: If you have less than $1,000 in paid defaults from financial institutions (e.g. banks) and less than $500 in paid defaults from non-financial institutions (e.g. phone companies) then you can borrow up to 85% or possibly 90% of the property value.
Moderate paid defaults: If you have up to $3,000 in paid defaults you can borrow up to 80% of the property value with a prime lender, up to 90% of the property value with a specialist lender or up to 100% of the property value if you have a security guarantee from your parents.
Large paid defaults: Larger paid defaults from $3,000 to $500,000 can be considered on a case by case basis if you have a very good explanation which supported with strong evidence. You can borrow up to 90% of the property value with a specialist lender.
Unpaid defaults: If you have any unpaid defaults then you can only borrow 90% of the property value, this is with a specialist lender. You will be required to pay the defaults before the loan is approved for purchases or from the loan when refinancing.
Judgements or court writs: If you have any judgements or court writs then you can borrow 90% of the property value, this is again, with a specialist lender.
Part IX agreement: You can refinance your current mortgage to pay out your agreement. You must be in the agreement for a minimum of 12 months and your repayments for the agreement & existing mortgage must be perfect.
Bankruptcy: You must be discharged, then you can borrow 90% of the property value, this is again, with a specialist lender.
Bad credit history home loans are generally for people who have had unfortunate events such as a divorce, loss of job, injury or business failure which has resulted in adverse entries on their credit file, in most cases there is a compelling reason about why you have defaulted.
How do specialist lenders work?
Specialist lenders are far more flexible than the major banks. The interest rates that are offered reflect the risk to the lender. Therefore, the higher the risk that your loan presents to the lender then the higher the interest rate you will be charged.
Specialist lenders will assess your bad credit history home loan application on a case by case basis and listen to your explanation about how you arrived in this situation and why you need debt relief. These lenders can often rapidly approve your application to meet deadlines from your creditors.
Generally if you are borrowing below 80% of the property value then you can get a cheaper interest rate, for those looking to borrow over 80% or have had severely impaired credit histories, then the rate will be higher.
Solution focused home loan lending
The idea of home loans for people with bad credit history is to be a short to medium term fix, not a long-term solution such as a second mortgage.
It is often much cheaper to pay a higher interest rate for a few years than it is to sell your home and then buy a new one later. The cost of selling then buying is often more than 8% of the property value.
You should always enter into a bad credit history mortgage with the intention of refinancing back to a prime lender in around 2 to 3 years’ time, when your credit history is clear again, to help you make a fresh start and allow you to keep your home, you will need to repay your bad debts; clean up your credit file and then once you have a proven track record of repayments on your home loan with no arrears you can refinance to a better interest rate.