How to overcome bad credit and get a home loan

How to overcome bad credit and get a home loan

So you’ve got a big bad black mark on your credit record and you want a mortgage? Don’t worry, all is not lost.

Banks like to lend to people who they believe have the disposable income and the will to pay them back. If your credit score is bad and there are a few sneaky black marks on it they might think that you’re not such a good bet.

Banks have to be responsible

What’s more, our banks are also governed by a little piece of legislation called the Responsible Lending Code. The gist of that law is that banks aren’t allowed to lend to you if you can’t afford to pay them back. They have to err on the side of caution when lending or find themselves in hot water. The law is designed to protect you from yourself and also lenders from being driven by the almighty dollar rather than your welfare. Sometimes rules like this backfire, meaning that potentially worthy customers can’t borrow.

The good news is that for many people in your situation there is still hope. You might even be able to clean up your credit score at the same time as paying a mortgage.

How to qualify for a home loan with bad credit

Where there’s a will, there’s a way says mortgage broker Jeff Royle of iLender. Steps to take if you find that your bank won’t lend include the following.

Be honest with yourself
Even though most people blame others for their black marks, the reality is that it’s often down to the way you’ve managed your finances. Take ownership. This will help you clean up your credit, but also approach lenders in the right frame of mind.

Tell the truth to the bank
Royle points out that banks aren’t happy if they catch you hiding your defaults. He’s seen borrowers turned down when the bank stumbles upon their credit black marks. Honestly is the best policy.

Get a broker
Mortgage brokers go into bat on your behalf and sometimes plead your case if your loan application is borderline. They can also be quite clever in how they package you to the lender. That’s not lying, but emphasising the positive aspects of your application. “It can be a jigsaw where seven of the eight pieces are good and one is not,” says Royle. They take these pieces and paint a picture of you that the bank might understand. Mortgage brokers also use a panel of banks, non-bank lenders and finance companies, and know which are most likely to accept borrowers in your position. Each lender has its own rules and it may be that you will be accepted by one, but not the others.

Turn over a new leaf
If painting a picture doesn’t work there are other options to improve the odds of approval. A good mortgage broker will school you in how to become a good financial citizen in the eyes of the bank. After six months of consistently good financial behaviour the lender may reconsider your position.

Clean up your credit
Start by paying off any outstanding debts that have led to defaults. Then ask the lenders to mark them as paid. Royle points out that some credit providers such as ACC, utilities companies and government departments load defaults quickly.

Get a bigger deposit
Thanks to the government’s loan to value ratio (LVR) rules you already need to stump up a pretty sizeable deposit. The higher your deposit, however, the less likely you are to be stretching your financial resources, which makes you more acceptable as a borrower.

Borrow from a non-bank
Mortgage brokers such as Royle have access to non-bank lenders and finance companies that both offer home loans. These loans can be more expensive, but not always. In the short term they can be a life saver and once you’re on the housing ladder you can often refinance into a bank six months or a year down the track, says Royle.

Finally, if you do get a home loan, make absolutely sure you never miss a payment, even if it means going without luxuries such as lunches out, new technology or whatever your poison is. If you pay each and every month on time you’ll soon start to build up your score making it easy to borrow next time or refinance. Start budgeting so that you never ever miss a payment and learn to spend within your means.

Credit Simple
Credit Simple

Credit Simple gives all Kiwis free access to their credit score, as well as their detailed credit report. See how your credit score compares by age, gender and community and gain valuable insights into what it all means.

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