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The Truth About Home Loans with Bad Credit (What Lenders Don’t Tell You)
194 Plays3 months ago
Think bad credit means you can’t get a home loan? Think again. In this episode, we break down how Australian banks assess your credit history, the myths around credit scores, and the steps you can take to improve your chances of approval. Whether you're a first-time buyer or looking to refinance, you'll learn how to explain past defaults, work with specialist lenders, and even transition to better rates over time—helping you secure a home loan, even with a less-than-perfect credit score.
Ready to explore your options? Get a free assessment from the experts at Hunter Galloway: huntergalloway.com.au
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Transcript
Can you get a home loan with bad credit in Australia?
00:00:00
Speaker
Can you get a home loan with bad credit in Australia? Absolutely. We'll cover everything from understanding your credit report to knowing how to position this right with your bank. You're going to learn the practical tips on how to boost your chances of approval, including how to best explain your default, what happened and when to consider refinancing for better rates.
00:00:16
Speaker
Whether you're a first-time home buyer who's just checked your credit score and found out there's some blemishes on there, or you're looking to refinance, this guide is packed with actual advice to help you navigate the world of bad credit home loans. Don't stress and don't dig your head into the sand. Bad credit doesn't need to hold you back from home ownership. Let's jump right in.
Navigating the Australian housing market
00:00:33
Speaker
Welcome to the Buying Your First Home Podcast, your personal guide through the Australian housing market. Here we tackle the big questions and the small details that come up when buying your first home. From financial prep to finding the right neighbourhood, we're here to ensure that you've got all the knowledge at your fingertips. So let's take the first step towards unlocking the door to your new home.
What are the misconceptions about credit scores in Australia?
00:00:58
Speaker
All right, so pop quiz, what is the minimum credit score needed for a home loan in Australia? Well, if you said anything above zero, you're kind of wrong. Yeah, the crazy thing is there is no minimum credit score. Some banks have criteria, like some of the small banks will want a minimum of 600. Others will be okay if you're applying with a partner, if they have a really good credit score, if yours is in the 400s. There are ways to mitigate this and still get your home loan approved, even through the banks without having to pay a higher home loan rate or getting penalized.
Factors beyond credit scores in loan approval
00:01:23
Speaker
So let's start with the credit score myth.
00:01:25
Speaker
You probably heard a thousand times that your credit score is everything when it comes to a home loan. And this is true in America, but not quite in Australia. In the United States, your credit score determines your home loan, your eligibility, and a bunch of things. So you might have seen videos before where people say, well, go get a credit card, you got to build up your credit history. And unfortunately, in Australia, that's just entirely incorrect. Even if you've never applied for credit before, you'll get pretty much a default credit score of around six or seven hundred, which is fine. As long as there's no negative credit history, that's the main thing the bank's looking for.
00:01:52
Speaker
But if you do have some negative credit history, that's okay. That's what this video is about. We're gonna walk you through how to work through that. The thing in Australia is lenders look at a much bigger picture. I was having a chat to a friend of mine who works as a credit officer at one of the big banks and she revealed that they don't just look at the credit score. It's more of a starting point.
00:02:07
Speaker
Actually, they're generally more interested in the story behind the numbers. In their banking system, they actually create a category score. Credit score just forms part of this. They'll look at things like your employment history, how stable you've been in your current job, your living history, if you've bounced around a lot, if you've changed jobs a lot, they'll look at your net assets for your age. So if you're 21 years old and you don't have a lot in savings, that's completely fine. But if you're 70 years old and have very little in net assets, they're going to ask questions, well, what happened here? Was there a divorce and what's the explanation behind it? They're gonna look at the type of job you've got and form an overall category score of which just the credit score forms a small part of. It's interesting because all these factors can influence your credit worthiness beyond that magic number of just your credit score. And don't get me wrong, your credit score still definitely does matters but it's not the only thing that matters. Think of it like this, your credit score is like the cover of your financial book. It gives the lender a quick idea of what to expect but they're gonna have to read the whole story before making a decision. So some of those other factors they consider are they wanting to make sure your income's coming from a steady source. Like I mentioned, they're going to look at your debt to income ratios. They're going to look at how much of your monthly income is going towards paying off debt. If you've got heaps of personal loans, that can be an issue. They're going to make sure potentially you've got genuine savings that might work for you if you've got a smaller deposit. And like I mentioned before, if you're hopping jobs every six months, it's not going to look as good as if you've been pretty stable in your employment for the last couple of years.
00:03:14
Speaker
All right, so it might be frustrating. You might be saying, well, what is the credit score that I need? What is the magic number to get my home loan approved? Well, different lenders have different criteria. Some that are real specialty lenders don't actually care. They don't have a minimum credit score. But like I mentioned, some of these lenders like Pepper or Liberty Money will charge higher interest rates because they're in the nonconforming space.
How can a strong financial profile help with a low credit score?
00:03:33
Speaker
But equally, I had a couple recently. One of them had a credit score of under 400. The other person had a perfect credit history. He'd missed a couple of repayments on his credit cards over the last few months. They'd been on holidays in Europe.
00:03:43
Speaker
And once we explain the story to the bank, we mitigate the risk, they had really good savings, really stable employment history. The bank didn't mind that they had a low credit score because on aggregate, both of them, all the application looked really strong. This is where it's important to have a broker that will understand and fully explain your situation and get in your corner to make sure the bank gets what's going on. I'm going to come back to how to best position this with the bank a bit later in the video. Decoding bad credit in the
Impact of defaults on credit scores and loans
00:04:04
Speaker
lender's eyes. One thing that often surprises people is a critical truth. Lenders are going to see your credit history in a different lens than what you might imagine. What if I told you a single $100 default could outweigh thousands of dollars in credit card debt? Yeah, $100 can completely derail things. Let me explain it. A credit default is when a borrower stops making a payment on a debt. This isn't if you're just a few days late. This happens if your payment's over 60 days overdue. The overdue payment is over $150.
00:04:28
Speaker
and the borrower has been notified of the overdue payment. The bank will generally put you through their default process. If you don't pay this, it'll go through a recovery process and sometimes get sent to a recovery agency like Pantera Finance or different ones you might have seen online. Now, this doesn't just happen on credit cards and payment default. A common one I see all the time is a telco default. So you might have a phone bill that you forgot about, that you moved to dress, that you didn't even receive, or even an energy bill that you got. And if it's over $150, they're going to slap it on default. And it can make a huge difference when you're looking to apply for a home loan.
00:04:57
Speaker
This is where it gets tricky if it's an unpaid default. I had a client recently who thought she was overcharged by an energy provider and had a $150 unpaid default on a credit file. She didn't want to play it just out of principle just saying she was still fighting the energy provider and didn't believe she should have been charged this money. The tricky part is if we apply for any bank, if you've got an unpaid default trying, it means you haven't paid that default, it means you're still in debate with that provider, then the bank's going to completely decline your loan. They'll only consider paid defaults. So although you might not agree with it, it's worth having a tattoo mortgage broker checking out your credit file before to work out the best strategy forward here. In some cases, as much as you might not agree, it might just be worth paying that $150 default, marking offers paid on your credit file and moving forward with your life. In my experience, typically anything under a $500 to $1000 telco or electricity default is fine with the banks provided you give a bit of an explanation. Some common ones I often see is where you might have moved homes, you might have moved overseas for a while and you never receive the default notices. You come back to Australia five years later, you come home to find out, well, well there's $150 owing to an electricity provider and it's on your credit file. Even after you've paid that, they don't need to remove it from your credit file.
00:06:00
Speaker
This is where you can talk to a credit fix agency to completely remove it after all if they haven't followed the right process. But like I said, $512,000 is usually okay as long as it makes sense. And as long as it's a telco or electricity default, it does get tricky if it's a credit card or financial provider default. If it's a bankruptcy or judgment, it's a lot trickier. A lot of the banks won't consider you if you have those outstanding on your credit files, have a chat to broker. And this is where you might need to look at a specialist lender like Pepper or Liberty, like I said, who specialize in this space and are a bit more comfortable with the situation and can consider things outside of the box.
00:06:30
Speaker
Like I said before, this is the front cover of your financial book, so some banks will make some pretty quick decisions. If it's an unpaid default, it's just a straight up no. If it's a small default, we can mitigate that and explain what happened, the reasons why, and why you should be considered for a home loan. If you're not sure of your credit score right now, go on Google, there's a couple of different websites where you can get a free credit report and find out if there's anything lurking behind there. Nine times out of 10, you're gonna be fine, you're gonna have a clean repayment history, but keep in mind that's on there. The other thing that shows up in your credit file is your repayment history, so it'll have any credit cards, personal loans, home loans, if you've got one, the repayment history for the last two years. If you've been more than 15 days late on repayment, it will show up on your credit file for the next two years. Now, this can be problematic if you've had a late repayment on a credit card within the last six months, but some banks have had a late repayment over that 15 days in the last two years, they will say straight up no.
00:07:18
Speaker
So for a lot of our clients, we will get your credit file as a read-only version before we start the application process, just to make sure everything's all hunky-dory on there and there's going to be nothing that's going to derail the home loan application process. This little step can really help with taking the stress out of the home loan process.
Ways to improve your credit score
00:07:31
Speaker
But how do you improve your credit score? So if you're looking at applying in a couple of years and you've seen your credit scores around 400, what can you do to mitigate this? And how can you get a better credit score?
00:07:39
Speaker
Like I mentioned earlier, at a certain point, if your credit score is over 650, for example, getting it to 1000 isn't gonna impact your homeland application. The banks aren't gonna give you a better interest rate. They're not gonna really care what drives that is the amount of deposit. If you've got a 10% deposit compared to a 20% deposit, if you've got a bigger deposit, your lower risk, they're gonna give you bigger rates. But if you've got a 600 credit score or 1000 credit score, they don't see you as less of a risk, even though you might be.
00:08:01
Speaker
But as far as trying to improve your credit score, will paying your bills on time help? No, because these aren't reflected in your credit score. Your Agile electricity bill or your Ergon or whatever's not going to be in there, but it does have your credit card history, your personal own history, so you always want to make sure these are paid on time. Every time you do apply for credit can impact your credit score, especially if it's a personal loan, if it's a payday lender, these can massively impact your credit score. If you do a lot of applications in short succession, it can reduce your credit score. So if you are trying to improve this, then potentially try and hold off applying for credit cards or personal loans over the next few months while you're preparing that credit score. Like I mentioned before, the fastest way to boost your credit score is to start with your credit report.
00:08:37
Speaker
Up to 30% of credit reports contain errors that could be dragging your score down. The good news is you have the right to dispute these errors and credit bureaus must
How to explain financial setbacks to lenders?
00:08:45
Speaker
investigate and correct them. You can get a free copy of your credit report online and scrutinize it carefully. Look for incorrect information or any unrecognized accounts. There can be late payments you've made on time or debts you've already paid off. If you find errors, dispute them immediately. Credit bureaus have to respond within 30 days. The art of the explanation. While boosting your credit score is critical, there's another strategy that can help tip your scales in your favor. It's how you explain these financial hiccups to the bank and how to mitigate them in the future. Like I said earlier, if there's a reason that makes a lot of sense, if you're traveling abroad, if you're going through a divorce, banks will understand and sympathize with this. But if you just miss the repayment because of financial mismanagement, it's not going to look really good when you miss, say, a $500 credit card payment and you're trying to apply for a $500,000 home loan. This is where a broker can help you out. We can walk through the situation, see what happens. I had some clients last year that had some pretty bad credit card payment history. It was around the time they just had their first kid, they weren't sleeping much and just didn't realize they'd missed some payments on a credit card that was in a completely different bank. It was showing on their credit file as over 30 days unpaid and late. When we actually got the statements, the credit card was only overdrawn by a few dollars.
00:09:48
Speaker
And this is the annoying thing. On the credit file, it just shows if it's late, but it doesn't actually show the story behind and the fact that it was just a couple of dollars overdrawn. In the loan submission I helped prepare, I gave the bank the statements at the time saying, hey, this bank, this is a couple of dollars overdrawn. It was a genuine mistake. I also showed them a separate account without holding tens of thousands of dollars in their potential savings. I said to the bank, well, they obviously had the money at the time. They just had a kid. They weren't sleeping that much. They could have moved the money across if they'd known it was in a completely different bank.
00:10:16
Speaker
please understand the situation. Going through it with the credit officer, they were completely fine with it. They said, yeah, that makes complete sense. They had the money. It was just an unfortunate set of circumstances. We're completely fine with that. It shows up on the credit files of late payment, but we're fine. This is also really common in a divorce where you might be fighting with your former partner and trying to work out who makes the payments, who shows up. And unfortunately, if you both miss the repayment on the home loan, it's going to show up in your credit history. Definitely get legal advice around this because this can impact you both moving forward. At the end of the day, a personalized approach can make this explanation help you get over any issues from the past. Painting a picture that you've moved through financial recovery, mitigating it saying you potentially had money sitting there, or if there's extenuating circumstances where you're traveling or stuck overseas during COVID can help tip the scales into your favor. Our job as a broker is to make the lender see you as a person and not just a credit score.
Options with specialist lenders for bad credit
00:11:01
Speaker
The specialist lender scenario.
00:11:02
Speaker
So what happens if you've got a judgment, if you've got a default of five or ten thousand dollars that's a credit card provider and that still happens in situations outside of your control? Well, the good news is there's not just the banks. In the Australian banking sector, we have different tiers of lenders. You've got the top tier major banks, smaller banks that are more conservative.
00:11:20
Speaker
But as a result, their interest rates are generally lower. Then you've got a tier under them of non-banks. These banks aren't as heavily regulated and scrutinized, and they'll help people in different situations. They won't have blanket systems that look at the credit score. They'll have a manual assessor look at everyone's situation on their merits and find a solution that helps you. But as a result, they generally charge a slightly higher interest rate and higher fees. They call this pricing for risk. These specialist lenders will place more weight on your recent financial behavior rather than older credit issues. They'll have specific programs for, say, self-employed people if you haven't done your tax returns for a couple of years.
00:11:49
Speaker
and look at things through a different lens. I've seen people who've been rejected by the major banks for something as silly as a thousand and one dollar outstanding telco bill and we'll be able to get around that with these specialist lenders. Like I said, there are trade-offs as far as the rates and fees, but for a lot of people getting to the market today can really help. And here's a little known fact. Many people that start with a specialist lender are able to refinance for standard home loan at better rates after a couple of years of consistent repayments.
00:12:14
Speaker
So specialist lenders can be the pathway to home ownership that might otherwise be out of reach. But as with every financial decision, it's not one size fits all. There's fears about empowering you with knowledge. If you're not sure about your situation, what can happen? Hit us up at Hunter Galloway, we'd love to help out and see what we can do to help you move forward in your situation. The refinancing roadmap.
Refinancing for better terms
00:12:31
Speaker
So let's say you've secured your home loan with a specialist lender. You're probably thinking, great, I'm stuck at these highest interest rates forever. But hold on, there's a financial maneuver that can help you move forward. I'm talking about refinancing.
00:12:41
Speaker
It's a strategy that can potentially save you thousands on your bad credit home loan. But surprisingly, most people don't even realize it's an option. You might think once you've had a bad credit loan, you sort of stuck there. That's the end of the story. But that's not the case. Refinancing is the process of replacing your current home loan with a new one, usually with better terms. And if you had some bad credit history in the past, this could be a way to get a better deal and help get your payments down.
00:13:00
Speaker
You might be wondering, if I couldn't get a home loan before, what makes you get one now? Well, that's the interesting thing. Your financial situation isn't just set in stone. Every on-time payment you make is slowly but surely improving your credit profile. Most lenders will want to see 12 months of perfect repayment histories on your current loan before considering refinancing.
00:13:15
Speaker
Depending on how bad your credit file was, some might want 24 months, but they show that you're serious about managing your finances and taking things responsibly. The best part is though, during this time, you're not just making repayments. You're also building equity in your home. As your property value potentially rises, your loan to value ratio improves. This makes you a more attractive borrower. Even if your credit score hasn't improved dramatically, you're a lower risk because your property's worth more and your loan might be worth the same. Refinancing from a specialist home loan to a standard home loan could save you anything from 1% to 2% on the home loan rate. On a $300,000 home loan, that could be $3,000 to $4,000 a year. But it's not just that. Some of these specialty loans have higher fees, so being able to refinance can get rid of those fees altogether or get you on better terms. So there you have it. Getting a home loan with bad credit isn't completely impossible or as hard as you might have thought. Sure, it's not as a walk in the park, but for the right strategy and the right broker, it's definitely achievable.
Steps to improve credit and achieve home ownership
00:14:03
Speaker
Remember, your credit situation isn't set in stone. It's a snapshot of your financial past, but not your future. The key is to take action. Start by checking your credit port, addressing any issues or errors that might be there, and working on improving your score if it's under 600. Consider talking to a mortgage broker to help work out the best strategy for you. They can guide you through the process and connect with lenders who are going to be fine in your situation. With patience, persistence, and the right approach, you can be holding the keys to your new home sooner than you think. If you need help with a home loan, hit us up at huntergalloway.com or you with a home for home buyers across Australia. Thanks so much. Until next time, I'll see you later.