Bad credit home loans

You can still get a home loan even if you have a troubled credit history. Here's how to do so

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Richard Whitten

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Rebecca Pike

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Key takeaways

  • When you apply for a home loan, banks and lenders check your credit file before you can get approved
  • Mortgage brokers are qualified experts who can help you find a mortgage. They specialise in helping borrowers in unique circumstances who have difficulty qualifying for regular home loans.
The average Australian borrower gets a home loan with a clean credit report. But for plenty of people that just isn't an option. Luckily, there are specialist lenders who offer bad credit home loans for Australian borrowers. Bad credit mortgages typically have higher interest rates and more fees, but if a regular lender can't help, it may be your best chance.

Here's what you need to do to find the right loan and increase your chances of getting approved.

What is a bad credit home loan?

At their core, bad credit home loans are similar to regular home loans: You save a deposit, borrow an amount of money, then pay it back with interest. But because you have poor credit, the loan will be a little more restricted or have higher fees and charges.

A typical bad credit home loan has:

Understanding how you ended up with bad credit

Start by understanding the causes behind your credit problems. You may find your credit history damaged if you:

  • Have unpaid bills. Make sure you keep your payments up to date and on time.
  • Have been declined for a loan. If you have recently been declined a home loan this will be recorded on your credit file. Many lenders will see this as a sign of impaired credit.
  • Made late payments. Late payments will also affect your credit history but they will not have as much of an effect as unpaid bills.
  • Have applied for credit too often. It is a general rule of thumb that you should only make an enquiry for credit once every 6 months. Any more than this could raise a red flag to lenders.
  • Have been declared bankrupt. If you have been declared bankrupt then you will have a bad credit rating that will stay on your credit history for seven years.

9 tips to get approved for a home loan with bad credit

When applying for a home loan with bad credit, there are a number of things borrowers can do to help their chances:

1. Get a copy of your credit file

All of your prospective home loan lenders will have a close look at your credit history before granting you a home loan, so you want to be able to discuss the negative marks on your credit file with confidence. You can get one free copy of your credit score with Finder. This will help keep you aware of any negative listings you might be able to fight against using a credit repair service.

2. Take steps to settle any outstanding debts

New lenders will want to know what you've done to address your past credit mishaps, so ensure that any defaults are paid and you do the right thing by your previous creditors.

3. See if a credit repair service can help you

Some bad credit listings, if placed on your file without proper adherence to the relevant laws, can be removed from your file. A credit repair specialist can help you in this regard. Removing negative listings from your credit file can help you apply for a regular home loan, avoiding the higher fees and interest rates of a bad credit home loan.

4. Apply for a loan with a specialist lender who looks beyond the numbers

Certain lenders in Australia specialise in bad credit home loans. These lenders, such as Pepper and Liberty Financial, look at your credit file and take into account that bad credit can result from a lifestyle change, such as divorce or illness, and will take into account your income and other factors to still grant you a loan, even if you're a discharged bankrupt or have negative listings on your file.

5. Don't apply for too many loans in one space of time

Your credit file includes all previous enquiries for credit, which includes past loan applications. Be careful who you apply for a home loan with if you already have bad credit. Too many enquiries in the same space of time can present another red flag to prospective lenders.

6. Tell your lender about your bad credit listings honestly

As with every lender, a non-conforming lender will look at all the red flags in your credit history. However, they will also ask for an explanation regarding each entry, and you will have to be thorough in the details you provide. If you try to hide something, you won't improve your credit rating. You will simply make the lender more suspicious. This may lead to your application being declined on the grounds that you were not being transparent enough or fully honest about your circumstances.

7. Think about Lenders Mortgage Insurance (LMI) before you apply

In Australia there are only 2 major LMI providers, Helia and QBE. They have their own lending criteria which they use to evaluate your loan, which can in some cases be stricter than that of your lender, leading to your application being rejected. Some lenders don't use these insurers, meaning there's no third party risk of being rejected for a home loan because of LMI. In most cases, these lenders, such as Pepper, have their own LMI alternative.

8. Avoid applying with a spouse who has bad credit if you can

If your partner is the one with bad credit, sometimes you can avoid rejection and the higher interest rates of a bad credit loan by applying as a single applicant. Just keep in mind that applying solo will reduce your borrowing capacity.

9. Eliminate your other debts to make your file look better

When your lender looks at your application, they'll take into account all of your current credit accounts, including credit cards and personal loans. If you can pay these off and close them before applying it'll be one less factor that will work against you when your lender decides whether to approve or reject you.

How does your credit affect your ability to get a home loan?

When you apply for a home loan, banks and lenders check your credit file before you can get approved. Your credit file acts as a representation of your credit history and can include unpaid bills, getting declined from a loan, late payments, if you have applied too often or if you have declared bankruptcy.

The lender will check your credit file and if you do have any negative marks, your options will be limited. All your past dealings with borrowed money are collected and used as an indication of your future ability to make repayments.

Fortunately, even if you do have a bad credit history, there are still some options available to assist you in successfully getting a home loan.

  • Non-conforming lenders. A non-conforming lender will go outside a regular lender's financial guidelines. This means, they may have different requirements compared to normal lenders' home loans. While these loans are an option for people with bad credit, they come with a few key differences. Loans from non-conforming lenders tend to be risky for the lender, this is why they often charge higher fees and rates to cover themselves.
  • Wait for negative marks to be removed from your credit file. Another option you have is to wait for negative marks to be removed. Your credit history doesn't stay on file forever. In most cases, your credit file usually goes back to how it was within 5 years. If you are able to wait for negative marks to be removed, this can significantly help you when applying for home loans.
  • Credit repair. Credit repair is the process of an agency refuting any incorrect listings on your file. If successful, you can have these errors removed from your credit history which, in turn, leads to a clean credit file. Keep in mind that this is an expensive process and there is no guarantee that listings can be removed, so be wary of any credit repair agency that claims they will be able to do this.

Can you get a mortgage if you've been bankrupt?

You may be able to get a loan if you're a discharged bankrupt. However, many banks and lenders will assess your application as being too risky and may decline based on your bankruptcy history.

That's why finding a specialist lender is important. Some Australian lenders specialising in lending to people with troubled credit histories include:

  • Pepper Money
  • Savvy
  • Red Rock Mortgages
  • Liberty

You can apply for a mortgage from the first day your bankruptcy ends, although your bankruptcy remains on your credit report for 5 years from the start of your bankruptcy, or 2 years after your bankruptcy ends (whichever is later).

Learn more about home loans for discharged bankrupts

How mortgage brokers can help you find a bad credit home loan

Mortgage brokers are qualified experts who can help you find a mortgage. They specialise in helping borrowers in unique circumstances who have difficulty qualifying for regular home loans. This includes borrowers with bad credit histories. Brokers can help you find lenders for your situation and help you organise your application to maximise your chances of approval.

A broker's service is usually free because they receive a commission from your lender, not from you.

Learn more about how mortgage brokers can help you

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To make sure you get accurate and helpful information, this guide has been reviewed by Rebecca Pike, a member of Finder's Editorial Review Board.
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Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

Richard's expertise
Richard has written 553 Finder guides across topics including:
  • Home loans
  • Property
  • Personal finance
  • Money-saving tips
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28 Responses

    Default Gravatar
    LukeFebruary 26, 2019

    I’ve always had a great credit rating and brought my first home at the age of 20 my ex partner after 15 yrs net banked 30k off my home loan and left me with a 11k rates bill that she defrauded me on to the point I had to declare bankruptcy I’m just about to finish my 3 yr period and have a permanent employment and would love to be able 1 day to own my own home again is it possible and if so how hard would it be for me

      Default Gravatar
      NikkiFebruary 27, 2019

      Hi Luke,

      Thanks for getting in touch with Finder. I’m sorry to hear about your current situation. There are loan options you can go for and our guide to refinancing after bankruptcy will jumpstart your search. As a friendly reminder, review the eligibility criteria of the loan before applying to increase your chances of approval. Read up on the terms and conditions and product disclosure statement and contact the bank should you need any clarifications about the policy.

      Best,
      Nikki

    Default Gravatar
    HarryNovember 11, 2018

    Hi! When applying for a mortgage in AU would a lender check an NZ credit file? Thanks

      AvatarFinder
      JohnNovember 12, 2018Finder

      Hi Harry,

      Thank you for leaving a question.

      Yes, an AU lender may have visibility to your NZ credit file when you apply and may also use this as consideration when approving your mortgage. You may check with the lender as well since this may be a case to case basis. Hope this helps!

      Cheers,
      Reggie

    Default Gravatar
    DeeOctober 3, 2016

    I don’t have bad credit but I am on the aged pension. I want to borrow $130,000 which will get me into a retirement village. This $130,000 is basically rent in advance. Will the fact that I am 68 yrs old be held against me. I have money in a long term investment account but don’t want to use this as it is to be used for incidental expenses that arise. Would a mortgage broker be of any help, as I imagine the banks won’t.

      AvatarFinder
      JenniferOctober 24, 2016Finder

      Hi Dee,

      Thank you for contacting finder.com.au we are a financial comparison website and general information service and therefore can only offer general advice and information.

      I understand your situation and it is true that people who rely on pension are less likely to get a non-conforming home loan. You may check our page here about home loans for pensiors https://www.finder.com.au/home-loans/home-loans-for-pensioners. Alternatively there are specific loans that are suited to your needs in regards to getting the funds for mocing into a retirement village called reverse mortgage’s https://www.finder.com.au/reverse-mortgages you may like to look into. You may talk to a broker to assess and help you on your home loan needs. Here is the link https://www.finder.com.au/mortgage-brokers.

      Hope this helps.

      Regards,
      Jennifer

    Default Gravatar
    EmmaSeptember 28, 2016

    We have been living in Australia for 4yrs. We have excellent credit score here. However, I have a NAP in NZ which I entered into just over a year ago and was discharged from a few weeks ago.
    I have been given varying information regarding the status of the NAP in Australia; some say it is considered to be a part ix other say it’s not.
    We would like to buy a home next year ….. is my NZ credit history relevant here ? I know of a few people who have bought homes here with bad credit overseas.

      AvatarFinder
      MaySeptember 29, 2016Finder

      Hi Emma,

      Thank you for your question.

      Different countries have independent credit files and reporting systems. So, your credit file report in Australia is not influenced by your credit history in NZ. Furthermore, credit histories don’t transfer between countries. Please feel free to read more invaluable information on our credit file FAQs.

      Now, if you’re planning on buying a property in Australia, lenders would generally assess your income, assets, liabilities, debts, and credit rating. The credit history you created in Australia will be reviewed by the lender – the better rating you get, the more you have chances of getting approved. They will consider as well all the other financial circumstances you have.

      Cheers,
      May

    Default Gravatar
    mandyDecember 22, 2015

    hi im in section 9 debt agreementim looking at purchasing a block of land.I have a deposit which is half the value of land .Would this put me in a better position to borrow other half money to purchase the land

      Default Gravatar
      JodieDecember 23, 2015

      Hi Mandy,

      Thanks for your comment.

      Each lender has different criteria that they allow when they lend funds. Lenders would generally assess your income, assets, liabilities, debts and credit rating. Your agreement appears on your credit report for 5 years from the start date of your agreement. This can sometimes be longer and may affect your ability to obtain credit.

      I recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that’s more inclined to review your application.

      I hope this helps.

      Regards
      Jodie

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