Credit History

Having a bad credit history will be an impediment when it comes to applying for a home loan, but all is not lost. Following the global financial crisis many alternative lenders who were happy to advance funds to people with poor credit histories have disappeared from the market but during the first six months of 2010 a small number of these lenders have been reappearing, ready to lend again.

This does not mean that obtaining a home loan will be easy, as there will be stringent conditions to meet in order to qualify. Also, as you would expect, the interest rates offered by these lenders will not be as attractive as those offered by mainstream banks, and there will be hefty fees to pay. Nevertheless, there is a way forward.

There are many factors involved when it comes to assessing applications for home loans because every lender in Australia has to conform to government legislation which requires them to lend responsibly. An applicant's credit history is an integral part of the assessment process and all lenders have to exercise due care and diligence when it comes to determining whether or not a loan should be approved.

How is a credit history assessed?

An applicant's credit history paints part of the overall picture and gives a lender an idea about an applicant's trustworthiness. In Australia, every time you lodge an application for credit, whether it is for a credit card, a personal loan, a home loan or a mobile phone, the application is logged onto your credit file where it can be subsequently viewed by other lenders every time you make a further application.

The details of the credit file include:

When the application was made.

What type of credit was sought. In other words was the application for a home loan, a personal loan, continuing credit like a credit card etc?

The dollar value of the credit applied for.

Any defaults or court judgements that have been entered against an applicant's name.

Any records of bankruptcy.

An important point to note is that there is no indication on the credit file as to whether the application was successful or not. Therefore, a lender has no definite evidence that the credit facility is current, and they have to rely upon the information provided in the application form provided by the applicant.

Armed with this information a lender is in a better position to assess an applicant's overall eligibility and there are several things they look out for.

How often does the applicant seek credit. People who have a large number of enquiries on the credit file immediately signal that they may be excessively credit hungry. When there are an excessive number of applications listed on the credit file, lenders will often seek an explanation from the borrower to see if there may have been extenuating circumstances to explain the pattern. A lender’s suspicion will be aroused if there are a large number of applications but only a few existing debts disclosed on the application form. They may choose to simply not believe that the applicant is telling the truth about their current liabilities and decline the loan on that basis.

The type of credit sought is important too. A person lodging several applications for home loans may simply be looking for best deal from a number of lenders before deciding which one to accept. But, if there are a lot of enquiries for credit cards it will be treated completely differently by a lender as this could indicate a person who is seeking credit almost as a habit. In some cases a lender may choose to decline an application immediately.

Defaults, Court judgements and Bankruptcies are red flagged by every lender. Bad credit lenders are no different in this respect and will seek an explanation about every judgement, default or bankruptcy process that appears on the credit file. Applicants will need to provide the full story about their credit history on the application form and they will need to be careful to record everything that has happened in the past. Not disclosing some elements of poor credit history will be treated with disdain by most lenders as it could indicate a lack of honesty on the part of the applicant.

So, in summary having a poor credit history is not an the death knell to an application but you will need to provide a full and detailed explanation as to how bills were left unpaid or loan commitments were not met.

Applicants need to be careful to meet the following standards:

Tell the complete story about your credit history. Explain every credit default, every court judgement and every aspect of a bankruptcy process. Give details, amounts, and dates and explain the circumstances in which the problems occurred. This could include things like sickness, accident or loss of job, and more importantly, what reason the lender should have to trust that your capacity to meet the obligations of the loan you are applying for.

Provide evidence of sufficient funds to complete the purchase. Most bad credit lenders will only lend to a maximum of 85% of the value of the property. This means applicants will have to have 15% deposit plus sufficient extra cash to pay for costs. In an ideal situation applicants should demonstrate that they have saved this money over a period of time and provide evidence with bank statements showing that the money has been accumulating in a savings account in the applicant's name.

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