Can You Get a Home Loan With Bad Credit?

Having a bad credit rating should not preclude you from finding a mortgage in Australia, though it will require some additional action on your behalf. There could be any number of reasons why your credit rating has slipped. These could range from missing a few bills or credit card payments all the way to multiple business bankruptcies. Your ability to navigate this setback will be based on your individual circumstances.

Having a bad credit history over an extended period of time will limit your options with some lenders. This is especially true now given the tightening of lending requirements, thanks to a combination of higher interest rates and the pandemic, which has made certain industries high risk from the banks’ perspective.

There are, however, still options available for those who endeavour to get their finances back on track. The great Australian home-ownership dream should not be unobtainable.

» MORE: How to buy a house in Australia

What is ‘bad credit’ when applying for a home loan?

A credit report includes comprehensive information about a person’s credit history and their current creditworthiness. It will also include a record of every loan you have ever applied for, including credit cards and applications that have been rejected.

A credit report is a historical record of your credit history, whereas a credit score is a number that a credit rating agency has arrived at based on all the financial information in the report. The credit rating is what the agency ascribes to the individual based on their credit score.

There are currently three credit rating companies operating in Australia – Equifax, Experian and Illion – and they each use their own metrics for credit scores/ratings. These can include:

any current loans you have outstanding,
your borrowing and repayment habits when applying for loans,
whether you have repaid them on time,
any missed payments or defaults on things ranging from water to electricity to rates,
any court judgements against you, and
the length of your credit history.

You can always obtain your credit rating from one of the agencies whenever you want to view it through what is known as a ‘soft check’, while a lender will do a ‘hard check’ to obtain your rating. Once you know what it is you can take steps to improve it if you’re not happy with it. Also, by checking your credit report, you’ll know what areas to improve before it gets reviewed in the future and is seen by a prospective mortgage lender.

The weightings each agency gives to particular things can be convoluted and ratings can differ between agencies. Having said that, having a higher number means greater choice regarding loans and better interest rates, while the lower the number is, the worse your credit rating will be and the harder it is to get loans.

The following are the rating guides for Australia’s three agencies:

Equifax:

Excellent: 853-1200

Very Good: 735-852

Good: 661-734

Average: 460-660

Below average: 0-459

Experian:

Excellent: 800-1000

Very Good: 700-799

Good: 625-699

Fair: 550-624

Below average 0-549

Illion:

Excellent: 800-1000

Very Good: 700-799

Good: 500-699

Room for improvement: 300-499

Low 1-299

Comprehensive credit reporting

In 2018-19, the federal government introduced Comprehensive Credit Reporting (CCR), which required the big four banks to participate fully in the credit reporting system. The result was that lenders now have far more insight into a would-be borrower’s true credit standing and their ability to make repayments.

CCR reporting includes everything from mortgages to credit cards, car loans and personal loans, and BNPL (buy now, pay later) services.

The advent of CCR also means that, with most credit accounts involved in comprehensive reporting, lenders have a much fuller picture of a would-be borrower’s track record. Previously, there may have been holes in their records, and those with poor credit scores had to provide more tangible evidence as to their loan suitability.

Options for those with bad credit

While the CCR initiative has definitely made getting a mortgage even more of a challenge on top of the recent tightening of other criteria, there are still options if you have a bad credit rating. The amount you can borrow given your current credit rating will depend on the individual lender, and each has their own policy regarding taking on ‘bad credit’ mortgagees.

Some lenders don’t use credit scores at all and prefer to look at your current employment and employment history, your ability to make regular repayments on your mortgage and the size of your deposit.

A good starting point is to talk to a mortgage broker. Mortgage brokers deal with a wide range of lenders, so they should be able to find you a loan that has an acceptable interest rate and fees and charges. They’re also qualified to examine the terms and conditions for anything you might not otherwise notice and they can also do the application on your behalf and negotiate with lenders for you.

Alternatively, you could find a guarantor who is willing to vouch for you. Often a good guarantor will be enough to secure you a mortgage, as long as you have stable employment or a solid source of income as a self-employed person and have saved for a deposit.

Should you get a home loan with bad credit?

Before taking the mortgage plunge, there’s a lot to take in. As part of all your budgeting considerations, you should also consider how much you can comfortably pay back as opposed to how much you can borrow, regardless of your financial situation, but especially if you’ve had issues repaying loans in the past. Just because you qualify to borrow a certain amount of money from a bank doesn’t mean it’s in your best financial interest to do so.

Additionally, you may want to consider if taking on a mortgage is the right course of action at the present time or whether it might be better to take the steps necessary to improve your credit score. You also need to be sure that you’re in the right frame of mind for what is likely to be the largest financial commitment of your life.

» MORE: How to get a home loan

Ways to improve your credit score

You may want to improve your credit rating before you apply for a mortgage. The easiest way is to start paying your bills on time and to establish good financial habits so you’re not constantly receiving late payment notices and fines. If you’re juggling multiple credit cards, you may also think about debt consolidation so you don’t have so many balls in the air at the same time, and you could obtain a lower overall interest rate.

Just be careful about what you apply for online, because every time you apply for a product and it’s rejected it could further negatively affect your credit score, so only apply for loans you have a good chance of being approved for.

In the end, clearing your debts is the simplest strategy as it removes blemishes against your name and will ultimately lead to a credit score re-rating.