While having some bad credit history will not stop you from qualifying for a bad credit mortgage, there are distinct differences between the loans offered by mainstream lenders and bad credit mortgages.
No deposit means no loan
This is non-negotiable even with a clean credit application. In today’s mortgage environment all lenders will want to see some evidence of your ability to save on your income. One such evidence source is having a good home loan deposit. While squeaky clean borrowers may be able to get away with only a 5% deposit, anyone with a history of bad credit needs to have at least 20% and in some cases more. If ll you have is a couple of thousand in savings – a bad credit mortgage ill not be possible. After all there are costs involved in purchasing a property well beyond the need for a deposit. With home prices where they are many buyers need at least $15,000 to simply cover the costs of stamp duty. Then there is legals etc.
Undischarged bad credit will result in application decline
When we talk about a bad credit mortgage – we refer to a loan offered to someone who used to have unpaid defaults, bankruptcy, judgements or a debt agreement in their past. However to qualify for a bad credit mortgage these really do need to be part of your past rather than your present. At the very least the borrower needs to demonstrate that with the money borrowed with the bad credit mortgage they will be able to pay out their bad debt and still remain under 80% loan to value ratio with their new mortgage. This can be very difficult, unless you have owned your property for many years and your current mortgage sits at 50%-60% only.
Rates will be higher – so your income needs to be higher
The worse is the borrower’s credit history, the higher risk their loan application presents to the lender and the more expensive their mortgage is likely to be. While you may not mind paying a little more for your home loan, you will need to be able to demonstrate to the lender that you can afford the mortgage, given the higher cost of interest, on your current income. Lenders will test mortgage affordability assuming rates increase by a further 2% and a repayment of principal and interest in the long run. On this basis qualifying for a more expensive mortgage is rather difficult unless you need to borrow a small amount only.
Try specialist lenders if your bank said “No”
Few mainstream lenders will want to deal with a bad credit applicant. If your lender of choice said “no” that does not mean that a specialist bad credit lender will do the same. It is worthwhile to seek out the assistance of a bad credit specialist to source the best lender for your circumstances.