How to secure a home loan with bad credit history
When the global financial crisis took hold a few years ago, there was a huge amount of fallout that affected the big banks as well as the man in the street. Many businesses were forced to close, while some people may have even defaulted on their home loans as finances became stretched in other areas.
Failing to make a loan repayment is never a nice experience, and it may leave you stressed in the short term, as well as impacting your future prospects when it comes to securing finance for big purchases. While defaulting can have an effect on your ability to take out a home loan in the future, that isn't to say the process is completely impossible.
In fact, there are several things to keep in mind if you've not been able to keep up with mortgage repayments in the past, but are now in the position to attempt to secure your dream home.
The first step in securing a new home loan after defaulting is a thorough assessment of your credit score.
Can I get a mortgage with a default?
This is a very common question to consider, and the short answer is yes. However, there is a number of criteria to consider. Online Mortgage Advisor explained that the first step is thoroughly assessing your credit score.
This process can be relatively simple, as there is a host of finance companies that offer specific services aimed at helping you better understand the records that banks may hold against you. Ultimately, you'll only be able to define which lenders will grant you a home loan after you - and your advisor, if you're using one - have a full rundown of your lending history.
Some lenders have strict policies in place, and may even reject people who have defaulted two or more times in the years prior to an application. Each lender may also use a different credit reporting agency to comb through your details, meaning that you need to come up with a list of lenders who will consider you for a loan, and those that won't.
Financial conditions across the wider market can make it difficult to keep up with the payments on a home loan.
A top scorer
As touched on, your credit score is central to whether your loan application gets accepted, or rejected out of hand. Research from Duke University explained that it is essentially a rundown of all of your prior financial activity - and a positive score can ultimately be an incredibly handy asset.
Naturally, if you defaulted one or more times, your credit score is unlikely to be at the optimum. This can make it particularly difficult to get the right loan in two ways. Firstly, as explained, there's a chance that lenders may not entertain your application at all.
Secondly, and perhaps more notably, is that your credit score can actually affect the amount of interest you pay. This is important if you're pursuing the option of a fixed home loan. While you may be able to secure several options, some will have increasingly high interest rates making the entire endeavour unsustainable in the long term.
Consequently, it's important to carry out a thorough home loan comparison, and really drill down into the arrangement that will be most suitable for your long-term financial needs.
A positive credit score can make it easier to secure a home loan with a more favourable interest rate.
Making the payment
Defaulting on a loan will naturally go down as a black mark on your monetary record, but as with many things in life, time can make it seem less serious than it initially was. However, State Custodians explained that while it is possible to secure a home loan after defaulting, it's only realistic if the default itself is paid off.
An unpaid default will act as a huge red flag to any mortgage lender, and could leave you really struggling to find a financial source that will aid in you in securing your dream home. It's best if you can repay the debt as soon as possible, and ensure that everything is squared away with the company that issued the loan you defaulted on.
Doing this will still make a dent in your credit score, but it means that the default can firmly be put in the past, rather than loom over any home mortgage applications that you are looking to make.
Meeting the payments - and clearing any defaulted obligations - is a must before you pursue another home loan.
Starting the recovery process
So, what's the best way to start recovering from a default and ensure that it doesn't hamper your credit score - and chances of getting a home mortgage - for many years to come? Well, it's a case of being savvy with finances in other ways.
Essentially, your credit score represents a rundown of every time you've secured some type of loan - no matter how small. Consequently, it's important to ensure that you don't allow a default on a home loan to affect your ability to make other payments.
While mortgage payments may be some of your biggest outgoings, everything from your utility bills to loans on a car will have some impact on your credit score. Paying these on time can help boost your standing to an extent, and reduce some of the fallout in the aftermath of defaulting on a mortgage.
As touched on, time is also key in recovering from a default. For example, the vast majority of lenders will begin to take failures to make payments less seriously after a few years.
"For someone who has a [default] on his or her credit report, his or her score can generally begin to recover after a couple of years, assuming the consumer stays current with their payments on all of their other credit accounts," explained Craig Watts, public affairs director of credit reporting software company FICO.
Travelling the road to recovering your credit score is a must if you're looking to take out a new home mortgage.
Striking a balance
So, if you've managed to get your credit score into a better place, is it time to immediately start applying? Well, it can be in some circumstances, but it's best to err on the side of caution if you have a history of defaulting. Finder.com.au explained that applying too often - and getting rejected - for a home loan can be detrimental.
This is due to the fact that lenders may get wise to the fact that others are consistently turning you down, and change their decision accordingly. Moreover, applying over an over again but getting nothing but rejection letters can negatively impact your credit score as well.
However, you can offset this if you're careful about when you apply, and do so with a lot of background knowledge to back up the decision.
Ultimately, while it is certainly possible to secure a home loan even if you've defaulted at some point, the main challenge is to ensure that you do enough homework. If you can work out your budget down to a tee, perhaps using a mortgage calculator, you'll be able to narrow down the list of lenders that are most relevant.
Moreover, seeking out external advice and finding out which avenues are worth exploring is also a must, if you're to find the perfect home loan.
There's no right or wrong answer when it comes to the ideal home loan if you've defaulted. If you're well aware of your financial history, and have enough insight on the best lenders, you could soon be moving into your dream home with all of the finance secured.