According to credit reporting agency Veda, over half a million (600,000) Australians are at a “high to extreme risk” of credit default, or not paying back a loan.
If you believe you will be stuck in the “rental trap” forever due to a poor credit history, remember that there are ways around this obstacle – you just have to make the most of what you have.
Here are some tips you can follow to improve your chances of buying a home with bad credit.
Pay off as many debts as possible
If you have debts such as credit cards owing or personal loans, it should be your top priority to pay these off first. A lender will be hesitant to take on a customer who is juggling multiple streams of debt at once. Before thinking about a deposit, you should start devoting more money to paying off debts, or consider consolidating them to simplify your financial burden.
It might be hard, but save a deposit
Though housing prices are climbing in most capital cities, you must save as much as possible for a home deposit. To make life easier, you should come up with at least a 20 per cent deposit. Higher, of course, is better. This gives your lender a higher loan-to-value. The higher this ratio, the less risk your lender is taking on. This gives lenders a greater incentive to approve a loan – though you may still be facing higher than usual interest rates.
You should create a household budget each month. This will show you (and lenders) how you could handle paying off a mortgage. You should first use a mortgage calculator to get an estimate of your monthly repayments, which provides a clearer picture of what you’re in for.
State your case with hard evidence
Once you have a budget and a deposit together, you need to state your case for being a sure bet. This means gathering payslips, financial statements, profit and loss (if you’re self-employed) statements, residential histories and references from employers. If you can show a prospective lender you’re paying off debts and have a deposit, this can help you in many ways.
Never cook the books
When you cook the books, you end up getting burned. You should never try to hide the truth about your finances, even though you think you might get away with it. Your broker or lender is on your side – don’t give them a reason to distrust you. Besides, there are 600,000 people out there in the same situation!
In time, by making payments on time and in full, you can refinance your bad credit loan into a more mainstream one with a lower interest rate. Once that hurdle is overcome, you could end up saving thousands over the life of your loan.
Bill Tsouvalas is founder and managing director at Savvy. He has a been working in the mortgage, vehicle & asset finance business for over a decade. He also writes articles on mortgage, finance, insurance and consumer protection related topics.