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What is considered to be ‘bad credit’?
Have you ever missed a payment on a bill, credit card, mortgage, or any other sort of debt?
It’s probably on your credit file, which is a record of your credit history kept by credit reporting organizations like Equifax (formerly Veda Advantage).
Credit providers, such as banks, consider such listings to be black marks, and they can prevent you from qualifying for a home loan. These are some examples:
- Mortgage arrears: You have fallen behind on your mortgage payments. The more missed payments you have had in the last six months, the more cautious lenders will be. Banks will generally not refinance your loan if you have missed even one payment in the last 24 months!
- Bad credit history: Adverse entries in your Equifax credit file, such as defaults, bankruptcy, judgements, court writs, or too many credit inquiries, can cast suspicion on your application.
- Lender credit history: Your previous credit history with the lender for whom you are applying. Lenders have a fairly long memory for consumers with whom they have previously experienced issues.
- Unpaid bills or tax: Outstanding bills, such as council rates or tax bills, are a sort of bad credit history that may not appear on your credit reports at first but may be shown on the supporting documents you must submit.
- Company in financial trouble: If you are the director of a firm that is in financial problems, receivership, or liquidation, your personal credit history may suffer.
- Over committed: If your obligations exceed your income, or your total assets are less than your total liabilities, the big banks may consider you insolvent or beyond rescue.
How do I get approved for a bad credit home loan?
Major banks and lenders will almost certainly reject your application, however there are non-conforming or specialty lenders who are more flexible in their lending criteria.
They will evaluate your home loan application on an individual basis and listen to your story about what went wrong and why having a home loan will improve your financial situation.
This is especially true for debtors who want to consolidate current debt.
Specialist lenders can frequently issue negative credit house loans quickly in order to satisfy creditors’ deadlines.
What information is on my credit file?
Your credit file contains information such as your name, date of birth, current address, prior address, drivers license number, employment, and past job.
All of the loans you’ve applied for in the last five years are on your credit report as “Enquiries.”
Other information, such as court judgments, court writs, and bankruptcy history, is maintained on your credit file; to learn more, visit our credit file page.
Who gets into bad credit?
Many Australians who have bad credit are not careless or “evil people.”
The majority of them have just been involved in an unfortunate life event, such as divorce, job loss, accident, or business failure, which has resulted in blemishes on their credit report.
People who have negative credit do not always live in the outskirts of the city.
Economists are well aware that affluent suburbs are the most vulnerable to financial stress when interest rates rise.
This is because their mortgages are typically significantly higher and more leveraged. As a result, their loan-to-value ratios (LVRs) are greater.
Add in the fact that earnings haven’t kept pace with housing price rise, and it’s simple to see how someone may become “overexposed” and get into a negative credit scenario.
The worst part is that even if you’ve only missed a handful of bill payments but have since improved your financial management, these entries can remain on your credit report for years.
The Comprehensive Credit Reporting (CCR) system, which was established in 2014, may be able to assist you in mitigating the negative components of your credit file.
However, if you have a clean credit history but a poor repayment history, you may be turned down for a home loan.
All Australian lenders do not currently publish information such as your repayment history, but it is something to keep an eye out for in the near future.
What are common financial stress indicators?
Before a black mark is formally recorded on your credit file, there can be a definite sequence of actions that can finally end in defaults or worse.
According to the Australian Bureau of Statistics’ (ABS) Household Expenditure Survey, the most prevalent financial stressors were:
- Being unable to raise $2000 in a week for something important.
- Spending more money than received.
- Being unable to pay utility bills like gas, electricity or telephone on time.
- Being unable to pay registration or insurance on time.
- Pawning or sold something to make ends meet.
- Going without meals.
- Seeking assistance from welfare/community organisations.
- Seeking financial help from friends or family.
These financial stress indicators were most common in younger households, with 70% of respondents reporting having encountered at least one of the following scenarios in the previous 12 months.
If you’re experiencing financial stress, you can always seek free financial counselling from the National Debt Helpline by calling 1800 007 007.
Before you agree to a home loan, you must first get your finances in order.
Why do banks knock people back for a mortgage?
Major banks or lenders may refuse to lend to Australians with negative credit for a variety of reasons.
It could be due to the type of bad credit you have or the quantity of your defaults, but having blemishes on your credit reports can generally prevent you from borrowing.
The reason for this is because it indicates to the bank that you may be untrustworthy as a mortgage owner.
However, there are lenders who specialize in negative credit house loans and examine your position with greater common sense.
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