Part 9
Home Loans - You have bad credit but your part 9 debt agreement is over or your
defaults are greater than 12 months old!
If you a looking for a home loan you
will learn very quickly that most banks prefer to deal with borrowers who
have a perfect credit history. A banks main objective is to generate
profits and reduce risk. When it comes to part
9 home loans or loans for people who have just come out of their part9 agreement this is particularly true. So when a bank has a large pool of
customers to choose from and a specific amount of funds to allocate in a given
period it is only natural ( in their eyes ) to exclude certain customers.
Borrowers who have had credit issues in the past are perceived as riskier &
because they are viewed this way will in general be excluded from finance
with certain banks.
In general, loans for people with
some degree of credit impairment are referred to as “bad credit loans”.
However, as mortgage brokers we use the phrase “specialist lending”. This
phrase is more accurate as it best conveys what we do when finding a home
loan for someone with bad credit. We seek to find you a home loan from a panel
of “specialist lenders” who deal with bad credit situations on a daily basis.
Credit impairment could be as simple as an unpaid phone account
listed on your Veda file right through to a past bankruptcy. It is your
brokers job to match you with the correct lender – the lender that is
comfortable with the facts as they are. Your broker is not there to try and
force a round peg in a square hole.
The Major
Causes of Bad Credit
Credit
problems can result from myriad issues, including but not limited to:
§
The end of a marriage
§
Layoffs or job losses
§
Personal injuries
§
Illness
§
Business failures
§
Commercial losses
Generally, an unforeseen event occurs and there is no
strategy in place to protect the customer. As a result they are not able to
meet their financial commitments.
What is
Bad Credit?
Bad
credit, or a low credit score, comes in several varieties. In searching
for a home loan, the most serious type of credit problem is missed payments on
an existing mortgage. The number of payments late or missed and the
number of days in arrears create a much higher risk that you will not repay the
new loan in a timely fashion. Refinancing loans are equally difficult
under these circumstances.
Other
borrowers may have multiple negative entries to their credit file, including
defaults on other loan instruments, bankruptcy filings, court writs and
judgments, and even an excessive number of credit inquiries to the borrower’s
credit file. Of particular concern should be any defaults or late
payments to the same provider who is processing the current application.
Past due bills and tax authority payments will also show
up as negative marks on your credit score. If you have pending council
rates or open tax bills, they may not show up on your credit report, but will
be shown on the loan supporting documentation. Furthermore, the debt to
income ratio of the borrower is a critical issue. If your ratio does not meet
the lenders requirements, your application can be immediately declined, as the service
on the loan would either be completely beyond your means or would create an
undue hardship.
Credit
Repair
It is possible to remedy much or all of the negative
information in your credit file. Once you have completed a review of your
file, determine if you have the time and ability to clear the negative items
before applying for a loan. In this case, the lender will not see a
negative report, and you may qualify for normal mortgage loans without any
increased interest rates or fees. Many credit repair companies are in
operation, but ensure that you are dealing with a reputable supplier to avoid
scams.
Be Aware
of the Information in Your File
Banks
use your credit file to perform the assessment. Among other things, your
credit file contains full identifying information, including name, current and
previous residence addresses, date of birth, your driver’s license number, and
current and previous employers. If you’ve applied for any loan or
financing in the previous 60 months, the credit review performed by the
potential lender shows up as an inquiry on your credit file. If you have
an excessive number of inquiries, this alone can drive your credit score
down. The file will also include any court writs or judgments and
bankruptcy filings.
There are many online services that allow you to review
your credit file and take the opportunity to contest any incorrect
information. We advise at minimum an annual review of your credit report.
Seeking
the Right Package
Lenders
who normally handle traditional loans will probably not take a risk on a
borrower with bad credit, even with solid explanations behind the negative
rating. The risk profile simply does not match the lending policies of
most institutions. In this case, a broker who is connected to specialist
and non-traditional lenders can make the difference between an approval and a
decline.
These lenders have more open guidelines for loan approvals.
It should be noted that non-traditional lenders typically carry a higher
interest rate to offset the added risk of working with bad credit
borrowers. There is an inverse relationship between the credit score and
the interest rate. The lower the credit score, the higher the interest
rate will be, but loans below 80% of the property value will be easier to
source. Severe credit problems and applications for loans over 80% of
property value will drive the interest rates much higher. Loans are
assessed individually, and the explanations behind the credit problems can make
a difference with some loan providers. Approvals are normally quicker
than average.
There are number banks and non bank lenders who
offer non-conforming loans or specialist loans to consumers with credit
problems. It is your brokers job to know which lender is the right fit for you.
Your broker will not try and put a round peg in a square hole.
The lenders that consider applicants with credit issues or
needing a part 9 home loan may include, but are not limited to:
§ Bluestone Mortgages
§ LaTrobe Financial
§ Liberty Financial
§ Pepper Home Loans
§ Adelaide Bank
§ Provident Capital
§ Resimac
§ Widebay Australia
§ and MKM Capital
Don’t worry about which lender too much. Your broker will know
exactly which lender is right for you once you have had your first
conversation. Each lender or bank has a clearly defined “credit policy” which
acts as their guidelines for what is and is not acceptable them them. Each
application is assessed within this framework. The policy of some lenders
mirrors each other while some lenders have unique and flexible guidelines.
Improve Your Chances for Approval
To improve your chances of default, understand some of the
criteria that the banks will assess and determine if your current situation
meets normal requirements.
§ Do you have minor
defaults of $500 or less on your credit record? If this type of default
has been cleared for over six months, your loan is more likely to be approved
at up to 90% of the property’s value.
§ Does your report
show multiple minor defaults? When these defaults amount to less than
$1,000 for issues with financial institutions or less than $500 for other
creditor types (like utility companies), approvals are possible for 85 to 90%
of the property’s value.
§ Are there larger
defaults on your credit history? Major defaults up to $3,000 that have
already been cleared can still lead to an approval of up to 80% of the
property’s value, without resorting to a non-conforming lender. In some
cases, you may be able to borrow 100% of the property’s value, but this will
require a guarantee. This can be provided by a parental security
guarantor loan, among other instruments. As the size of the default grows
the difficulty in approval increases. Problems up to $10,000, if already
cleared, may still achieve approval. Each application is considered
individually, and the reasons behind the default are important. Be
prepared to provide evidentiary documentation to support the explanations.
§ Do you have any
unpaid defaults? This will drive you directly to a non-conforming
lender. Even these specialized banks will cap your loan at 80% of the
property’s value. Judgments or court writs on your credit report will
have a similar effect. Paid defaults and unpaid defaults, as well as
settled defaults (there is an agreement in place to clear the debt) will still
show on your credit report. All of these items have a negative impact on
your file and your credit rating.
§ Are you currently
under the terms of a Part IX agreement or a bankruptcy? For loans with
these conditions, consult your broker directly, or perform additional research
under these specifics.
§ Does your file show
an excessive number of inquiries? Prime lenders are looking to see not
more than 2 inquiries in the past six months. Some non-conforming or
specialist lenders may still approve loans with more inquiries on record.
§ Is your current
mortgage current? If you have past due payments, late payments, or missed
payments, your mortgage loan is in arrears. Traditional lending
institutions will not lend you money under these conditions. If your loan
is new (less than one year old), the situation is even more critical. A
specialized mortgage broker may still be able to find you financing, but it is
a very difficult set of circumstances.
Here we will offer some additional short information related to
the points above.
Debt judgments: are a very
serious signal to potential lenders. These judgments show that the
borrower is or has been in financial difficulties. Many lenders will not
consider an application if your file shows judgments, so check before applying.
Court writs and court summons: also present
difficulties. The writ may be a warrant, a prerogative writ, or a
subpoena, but in all cases creates a prohibition for the affected person to
perform certain actions. Traditional banks shy away from borrowers who
have writs on their credit file. Similarly, a summons typically informs
the affected person that a legal action has been started with them named as a
claimant. This indicates that future claims against income or assets
could be levied, increasing the security risk for the lender and limiting
approval options.
An active bankruptcy on
your file should be discharged if possible prior to your application. If
you have the possibility to have the bankruptcy filing annulled, the bankruptcy
no longer exists, and will be removed much earlier than in case of normal
discharge.
Part IX Home Loans and Part X
Proceedings
To prevent an actual bankruptcy
filing, many people with financial problems instead choose to enter a Part IXagreement.
This arrangement is more flexible than a bankruptcy and offers many
options. In some cases, creditors may agree to accept a smaller sum than
their actual balance to clear a debt. Repayments to your creditors are
renegotiated to enable you to afford the payment out of normal income, and some
creditors may accept the transfer of property to the creditors in satisfaction
of the debt. If required, repayment can be temporarily halted by a Part
IX agreement. Finally, holding a Part IX agreement instead of a
bankruptcy allows banks more leeway in considering your loan application for
approval.
Part X agreements are a further step, providing for an agreement
between debtor and creditor. The debtor proposes a solution to the
creditors, and a formal vote decides. This takes the resolution out of
the hands of the court and provides a simpler solution.
Alternative Loan Types
For normally-qualified buyers, loans can be approved in some
cases with reduced documentation or no documentation at all in terms of income
verification. This is more difficult when the borrower has a negative
credit history. Lenders specializing in bad credit have more flexibility
than traditional banks when dealing with the self-employed. Often these
borrowers cannot provide tax return data to prove income, especially when the
business is a startup or has been officially registered for under two years.
In some extreme cases, a low document loan can be approved even
if the borrower has serious credit issues such as mortgage arrears, unpaid
defaults, or discharged bankruptcies. A borrower’s declaration or an
accountant’s letter will be needed to verify income, and loans are typically
capped at 60% of the property’s value. Up to 80% loans can be approved in
some cases, but definitely with a higher interest rate.
No doc loans are somewhat more challenging with bad
credit. See your specialist broker for assistance.
Part 9 Home Loan Interest Rates
Part 9 home loans typically carry a higher interest rate but the
idea is to create a flexible and affordable loan. We don’t recommend that you
carry this loan to full term and either do the lenders. Typically, these loans
remain in place for 2 to 5 years until the borrower can shows good conduct on
the loan. Once established the rates and options change for the better.
This financing model should be used as a recovery device instead. Take
the higher interest loan in the short term, and then plan on refinancing the
loan to a traditional lender in the two to three year time frame. This
allows the borrower enough time to repay any open debts, correct the negative
items on your credit file, and keep your new loan payments current.
Once you’ve cleared all of the negative issues, refinance into a
twenty-five to thirty year fixed rate mortgage to provide more security and a
lower repayment.
Debt Consolidation
Many borrowers will use part of the loan proceeds to provide
debt consolidation. The benefit here is that combining higher-interest
rate debts into one lower-interest rate loan will allow much faster repayment
at a lower overall cost. Consolidation can limit any ongoing damage to
your credit file and stop a possible repossession action by your mortgage lender.
Conversely, taking additional funds for consolidation may
increase the overall rate on your home loan. These loans may already
carry an increased exit fee for the first two to three years, so getting the
refinancing done early may be impossible.
Additional Notes
Borrowers with bad credit will have trouble qualifying for a
home equity loan. Banks already view an equity release as a higher risk
proposition, and a negative credit score only reinforces this point.
Additional discussion with your lender or with a professional broker can help
to determine if you have potential for this type of approval.
If you already own property and you have equity built up,
private financing should also be considered as an option. Specialized
brokers can assist in finding a private lender who will work with bad credit
loans.
As mentioned above, the general plan is to take a specialized
loan in the short term, and to refinance a short time later to a prime lender
and a regular loan. If you are unable to do this, there are more
alternative approaches. Consider refinancing to a different
non-conforming lender with a lower rate, and then later refinancing a second
time to a prime lender.
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