Getting to Know About Bad Credit Home Loans
Let’s start with what a bad credit home loan actually is. These are specialist loans designed for people whose credit histories are less than perfect. If you have had defaults, late payments, or even a bankruptcy in your past, these loans exist to help you. Many borrowers with a challenging credit history use these loans to secure their first property.
Traditional banks often focus heavily on your past. A lender who offers home loans to applicants with low credit scores, however, is more interested in your present and future. They want to see that you have a stable income right now and that you can comfortably manage the new loan repayments.
This shift in focus gives people with past credit challenges a chance to get into the property market and start building equity, without waiting years for their credit file to become spotless.
Many of these loans come from non-bank lenders. These are specialist institutions that don’t have the same strict rules as the big banks. This allows them to be more flexible and look at your entire financial picture, not just a number on a credit report, a distinction explained further in this non-bank lender overview.
Understanding Traditional or Mainstream Home Loans
When most people think of a home loan, they are picturing a traditional loan. These are offered by the big banks, building societies, and credit unions. These lenders are known as Authorised Deposit-taking Institutions (ADIs), which means they can hold your savings.
To get a traditional home loan, you generally need a clean credit history, a stable job, and a solid deposit. If you meet these criteria, you will be rewarded with some of the most competitive rates on the market and access to handy features like offset accounts. The downside is their process is very strict. If your financial history is a bit complicated, you might find the door closed.
Key Differences:
Credit Score Needs
Traditional lenders usually want to see a credit score of at least 600, and higher scores get the better deals. Any recent defaults can lead to a quick rejection.
Bad credit / non-bank lenders are much more flexible. Some will consider applicants with scores as low as 400. They are more willing to listen to your story. They want to know why your credit suffered and how your situation has improved. It is about your current ability to pay, not just your past mistakes, particularly when loans fall outside standard bank policy such as non-conforming home loans.
Proving Your Income
All lenders need to know you can afford the repayments. Traditional lenders will ask for two years of tax returns, payslips, and bank statements. If you are self-employed, the scrutiny is even higher.
Bad credit / non-bank lenders often use a different approach. They might be happy with just 6 months of solid bank statements or business income that show a healthy, consistent cash flow.
Interest Rates and Fees
Traditional home loans have the advantage of lower interest rates. Currently, you might see rates between 6% and 7% for borrowers with good credit. This is because the bank sees you as a safe bet.
Bad credit home loans are more expensive. The interest rates are typically 1-2% higher than standard rates.
When it comes to fees, the pattern continues. Traditional loans come with standard application and ongoing fees. Bad credit loans often have higher establishment fees and ongoing charges. LMI is also almost always mandatory, even with a larger deposit. Many borrowers also explore refinancing options after improving their credit to switch to cheaper traditional loans.
Weighing the Pros and Cons
The Case for a Bad Credit Home Loan
- Immediate opportunity to buy a home.
- Mortgage repayments help rebuild damaged credit.
- Flexible criteria focus on your overall financial situation, not just your credit score.
The Downsides of a Bad Credit Home Loan
- Higher interest and fees over the life of the loan.
- Limited lender options, reducing your ability to shop for better deals.
The Case for a Traditional Home Loan
- Lower interest rates save tens of thousands of dollars.
- Access to features like offset accounts to pay off your loan faster.
- Wide availability across banks for easy comparison.
The Downsides of a Traditional Home Loan
- Strict eligibility rules exclude many borrowers.
- Complex financial situations can lead to a slow and frustrating application process.
Which Loan is Truly Right For You?
Consider your personal situation carefully:
- Get a copy of your credit report. Know your score and what’s on it.
- Assess your savings. How much deposit have you genuinely saved?
- Be realistic about your income. Can you cover higher repayments of a bad credit loan?
- Think about your timeline. Can you wait to improve your credit score, or do you need to buy now?
In some cases, borrowers may also consider shared applications to strengthen serviceability, similar to the approach discussed in this co-borrowing guide.
Why Talking to a Mortgage Broker is a Smart Move
A mortgage broker can be your greatest ally. We understand the market, know which non-bank lenders are reliable, and can find the best options for someone with your credit history. We can do the shopping for you, present your options, and negotiate on your behalf.