Getting a mortgage can be challenging if you have bad credit or no credit history. Banks tend to perceive you as more of a risk and are generally less inclined to approve your home loan application.
But that doesn’t mean it’s impossible to get a mortgage. Here at iLender, we work closely with many lenders who may allow you to borrow even if you have multiple blemishes on your credit history.
In this article, we’re going to explore why banks are hesitant to loan to people with bad credit and how non-bank lenders can help you secure your dream home.
What is bad credit?
Before we get into bad credit mortgages, let’s first take a look at what bad credit actually is. In a nutshell, your credit score is a rating that helps lenders evaluate your creditworthiness – that is, how suitable you are to receive financial credit, and how likely are you to pay it back.
Your score is based on your financial history and takes many variables into account, including your current debt, payment history, overdrafts, credit cards, personal loans and more.
The higher your score, the more attractive you are as a borrower and the more likely it is that a bank will give you a home loan.
Bad credit is essentially a low credit score. For example, missing payments on your credit card, defaulting on a loan, entering bankruptcy or owning a company that is in financial trouble can all lower your credit score.
How to find your credit rating
If you’re curious about your credit rating, you can get a free credit report here. This report doesn’t determine whether or not you’ll be approved for a mortgage, but it can be a good indicator of potential issues that may affect your application.
Can you get a home loan from a bank if you have bad credit?
Regardless of your current financial situation, a bad credit score indicates that you’re a higher risk as a borrower. As a result, if you have bad credit, you’ll probably find it difficult to get a loan from one of the major banks.
Not only are the major banks generally quite risk averse, but they’re also governed by the Responsible Lending Code. This law says that banks must operate ethically and are not allowed to lend to people who can’t afford the loan. Under this law, banks are obligated to ensure a loan is suitable for your needs and that you can afford to make payments.
This code is designed to protect consumers from themselves, but in some cases it can prevent banks from loaning to legitimate borrowers. The good news is there are other options.
Bad credit home loans
A bad credit mortgage is a home loan tailored to people who may have had credit issues in the past or self-employed people who have no credit history.
These types of loans give you the opportunity to buy your first home or invest in the real estate market despite financial hiccups in the past. They are an excellent option for prospective home buyers who have been unable to secure a home loan through one of the major banks.
Bad credit mortgages are typically offered by non-bank lenders. A non-bank lender is a financial institute that is not a bank, such as a credit union or building society. These institutes are not subject to the same laws and restrictions that govern banks, which gives them more autonomy regarding lending criteria and mortgage products.
Are bad credit home loans expensive?
Bad credit home loans typically have slightly higher (yet still competitive) rates due to the perceived level of risk. However, most people find that the benefits of being able to secure a mortgage and a home easily outweigh the additional costs.
What’s more, you probably won’t be on those same rates forever. Provided you make payments on time, you may be able to refinance your mortgage into a conventional bank loan with lower rates further down the track.
How to get a home loan with bad credit
Here at iLender, we understand that life is full of surprises and we firmly believe that a financial slip up in the past shouldn’t prevent you from buying property in the present.
Has your bank rejected your application? Whether you’re self-employed, have credit issues or your accounts are in arrears, we’re here to help. We work with a wide range of lenders to help you secure a mortgage that suits your specific needs. Give us a call on 0800 536 337 to learn more.
At iLender we put your best interests first and not the Bank - our advice is impartial as all Lenders who we do business with pay about the same in commissions.
Although we are Auckland based Mortgage Brokers, we help customers everywhere in New Zealand and overseas with buying property in New Zealand, as we are very much about online and giving advice here and now!