I recently had a loan approved for a lovely couple from Victoria who were in the unfortunate situation of having bad credit history. In this case, the couple were well aware of their poor credit situation but a lot of us will encounter a default on our credit report without even knowing about it until it comes time to apply for finance.
Why is that?
Well, a lot of companies, especially the telecommunication companies will slap on a default when only one or two payments have been missed, sometimes only for an amount less than $150...however, even this small amount can really hurt the chances of obtaining a loan approval if looking to borrow at a high LVR.
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What can I do If I have bad credit history?
Sometimes there will be nothing that you can do, except to make sure the debt is fully repaid and just wait it out. It also depends on the size of the default and the LVR level in which you want to borrow.
There are also lenders who specialize in bad credit home loans. I will write an upcoming post on these lenders who provide loans for bad credit. Usually non-conforming lenders will target the market of loans for people with bad credit and some actually offer reasonable interest rates.
And sometimes there are some ways around bad credit through major lenders as you will see in the following example...
Now back to the couple who had an issue with bad credit.
A few years ago the husband had been self-employed and had gotten into a little trouble on the credit card, which had turned into an unpaid default listed on the credit report which meant they have been turned away from one of the big 4 banks. It was not a huge amount but the fact it was unpaid was a big factor here...
On the face of it, and without the default, they were a dream application for a lender
-good incomes and employment history
- a young couple
- over $100k as a deposit
the only thing holding them back was the default!
They had found their dream block of land which they needed to secure and weren't really planning on building on it for at least 18 months.
I knew the lender would not accept the spouse on the application due to his credit history but what people don't realize is that if this person is 'self sufficient' ie. earning an income for themselves which can be evidenced then this person can be left off the application and the lender won't include them in servicing.
So a married couple can be submitted as a single applicant?
Yes that's right!
In this case, it worked out perfectly because the loan amount to secure the land can be serviced on the female applicant income only as we did not need to include the spouse in the serviceability calculations as we had demonstrated he earns his own income and is not dependent on the female's income.
This gives him time to clean up and pay his credit default and when it comes time to construct we can add him back as a borrower and use his income in servicing the loan for the construction.
Bad credit and LMI
Lenders have become very fickle when it comes to bad credit history. I've seen very solid applications been turned down at 95% LVR due to single paid default under $100.
You see, at 95% application are subject to Lenders Mortgage Insurance (LMI) and it is the insurers who have the final say on the approval of an application.
It's really important to make sure all the small debts & loans you may have are paid on time and even when moving residences, make sure that the phone or gas or electric company knows all the new details as to where to send the bill.
So often the applicant's reason for the default has been that they moved residence and never received the bill. Although I understand the reason and am happy with the explanation, it's a tough ask to convince the mortgage insurers!
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