Bad credit home loans: what lenders accept, and when waiting costs less

Can you get a home loan with bad credit?

Sometimes, yes, but a home loan with bad credit depends on what the problem is, not on the label. A lender reads four things on your file: the type of listing, the amount, whether it's been paid, and how long ago it happened. A small, paid phone bill default is a very different file from an unpaid credit card default or a court judgment.

Money Brain has read two lenders' full credit policies on this. Firstmac declines any history of a financial default, a court writ, a petition or a bankruptcy. Its one exception is a small, paid telco or utility default [1]. A second lender treats outstanding defaults, judgments, court writs and bankruptcy as unacceptable outright, and will consider a paid non-financial default of $500 or less with an explanation [2].

Outside those narrow doors are specialist lenders, set up for borrowers a bank turns down, usually at a higher rate. Whether one of them is right for you, or whether waiting a while is cheaper, is a numbers question this guide works through.

What this means for you: the question isn't "will anyone lend to me?" It's "which kind of lender does my file fit today, and what would have to change for a better one?" That's a question with a real answer once you've seen your own file.

What counts as bad credit?

Bad credit is anything on your credit file that tells a lender a past debt wasn't paid as agreed. It isn't one thing. The table lists the entries lenders weigh, from the lightest to the heaviest. How the two lenders we have read treat each one follows.

Several enquiries close together can look like someone being turned down, and a lender reads repayment history month by month. A non-financial default is the only kind either lender we have read will consider, and only if it is small and paid [1][2]. Firstmac declines any financial default however small or old [1]. Court writs are declined at Firstmac, and judgments and writs are unacceptable at the second lender [1][2]. Bankruptcy and petitions are declined at Firstmac, and bankrupts are unacceptable at the second lender [1][2].

Financial or non-financial default: why the difference matters

A financial default is listed by a lender, such as a bank, a credit card provider or a car finance company. A non-financial default is listed by a company that provides a service, such as a phone, internet, gas, power or water company. The difference matters more than the dollar amount.

At Firstmac, a financial default of any size, at any age, means the application is declined. A non-financial default can be considered, but only if it meets all four of the conditions in the next part [1]. At the second lender we've read, the $500 line applies to paid non-financial defaults; above $500, a past default is an exception the lender's business development manager (its broker relationship manager) has to agree to [2].

So a $300 phone bill and a $300 credit card are not the same file. The first can be a door. The second, at Firstmac, isn't.

What a second lender's credit policy says

A second lender whose full credit guidelines Money Brain has read draws its line in a slightly different place. It treats these as unacceptable outright: bankrupts, judgments, court writs, and any default that's still outstanding, financial or non-financial [2].

A paid non-financial default of $500 or less can be considered, with a satisfactory explanation. A past default over $500 can only be considered as an exception, through the lender's business development manager. And any adverse finding on the file has to come with your own explanation of it [2].

What this means for you: at a mainstream lender, the space to negotiate is small and it's measured in hundreds of dollars, not thousands. If your default is a paid utility bill under those lines, it may not stop you at all. If it's unpaid, the first move is usually paying it, not applying.

Can you get a home loan with a default?

A home loan with a default on your file is possible at some lenders, and the four tests decide which. Is it financial or non-financial? Is it paid? How much was it? How long ago was it listed?

A paid telco or utility default of $500 or less can be considered at both lenders we've read, with your explanation [1][2]. Between $500 and $1,000, Firstmac's policy still allows it if all four of its tests are met, while the second lender treats it as an exception [1][2]. Any unpaid default is a decline at both, and a financial default is a decline at Firstmac however small [1][2]. Past that point, the choice is a specialist lender, or waiting for the listing to come off your file.

Can you get a home loan with a low credit score?

A low credit score makes a home loan harder, but a lender reads the whole file, not just the number. There's no single pass mark that every lender publishes. One we can quote: Firstmac's bridging loan needs an Equifax score of at least 700 from the main borrower [1]. Its debt consolidation rules rely on a "satisfactory" Equifax score without printing a number [1].

Your score also isn't one number. An Equifax report can carry more than one score, each built a different way: the Equifax One Score, a Comprehensive Score and a Veda Score [4]. So the number you've seen may not be the one a lender is reading. Ask which one it is.

And a score affects more than yes or no. NAB says the share of the price banks will lend depends partly on your credit history, along with the loan amount, the property's location, your income and job history, and the type of loan [3].

How to see your own credit file, free

You can ask for your own credit report free from each credit reporting body, and it's worth doing before you apply. Equifax is the one Firstmac relies on [1], but different lenders use different bodies, and the reports don't always match.

When it arrives, read it line by line. Check every default: who listed it, the amount, the date it was listed, and whether it shows as paid. Check you recognise every account and every enquiry. An enquiry or an account you don't recognise can be an error, or a sign someone has used your identity.

Do this before you apply anywhere. A report you've ordered yourself is for your eyes. An application is something a lender sees.

Why an application stalls if you've put a ban on your file

If you've asked Equifax to put a ban on your credit file because you were worried about fraud, a lender can't see your report until the ban ends. Firstmac's policy says that while the ban is active, Equifax returns no credit report at all, and a loan assessment can't be completed until the ban period ends [1].

Someone who did the responsible thing after their identity was stolen can find their application stuck with no explanation. If you have a ban, say so before anything is lodged, and ask the credit reporting body how and when the ban ends before you apply.

Does applying for a home loan affect your credit score?

Applying for a home loan does affect your credit file: each application adds an enquiry that the next lender will see. One application is normal. Several in a short time, after a decline or two, is the pattern lenders notice, and it's an easy one to fall into.

That's the case for doing the checking first: read your own file, find the lenders whose policy fits it, and apply once.

When does a default drop off your credit file?

A default drops off your credit file once its listing period ends. The period is set by the credit reporting rules, it differs by type of listing, and it runs from the date the default was listed, which is printed on your report. So the date your file gets clearer can be worked out from your own report, not guessed.

Paying a default doesn't remove it early. It changes how it's shown, from outstanding to paid. That still matters a great deal: at both lenders we've read, an unpaid default is a decline, while a small, paid non-financial one can be considered [1][2].

That date is worth knowing, because it can mean the right answer is to wait.

When waiting beats borrowing now

Waiting beats borrowing now when the extra cost of a higher rate, for the months until your file clears, is more than waiting costs you. Two numbers decide it: how many months until your file fits a mainstream lender, and how much more a specialist loan would cost each month in the meantime.

An illustration, not a quote: on a $500,000 loan over 30 years, a rate 2 percentage points higher costs about $10,000 more in interest in the first year, and about $20,000 more over two years [9]. If your default is listed close to the end of its period, or you can pay it and meet a mainstream lender's line, a few months of waiting can cost far less than a specialist loan.

Waiting isn't free either. You may be paying rent, and the home you want may cost more later. That's why it's worked out on your own dates and figures, not as a rule.

What this means for you: before you take a specialist loan, find out the date your file changes. If it's close, waiting may well be the cheaper move. If it's years away, a specialist loan with a planned way out can make sense.

Is credit repair worth paying for?

Paying a credit repair firm is rarely worth it, because what it can do for a fee you can usually do yourself. You can ask for an error to be corrected without paying, and a listing that's correct isn't removed just because someone asks.

Before you pay anyone to fix a credit problem, ask what they'll do that you can't, what it costs in writing, and whether they hold a licence. If the answer to any of those is unclear, keep your money.

What a specialist loan costs against a mainstream one

A specialist loan costs more than a mainstream one mostly through its rate, and the gap is worth seeing in dollars over the time you hold it, not as a percentage. Specialist rates vary with the borrower's file and the lender, so we don't print one here. This table shows what each extra percentage point costs on the same loan:

An illustration, not a quote, and no lender's rate [9]. The gap between 6% and 8% is about $671 a month. Over two years it's about $20,000 of extra interest; held for the full 30 years it's about $241,600.

Worth knowing: the cost of a specialist loan is set by how long you keep it. Two years at a higher rate is a cost you can plan for. Thirty years at it is the expensive mistake.

How much deposit do you need with bad credit?

With bad credit, your deposit matters more, because a lender is weighing two risks at once. NAB says the share of the price banks lend depends on your credit history as well as the loan amount, the location, your income and job history, and the type of loan [3]. A bigger deposit means a smaller loan against the home, and less resting on your file alone.

Above 80% of the value, lenders mortgage insurance (LMI) usually applies; at or under 80% it normally doesn't [8]. A government scheme or a family guarantee can change the deposit you need, but not the credit check: the lender still assesses your file, your income and your debts. More on no deposit home loans and guarantor home loans.

Can you refinance your home loan with bad credit?

You can refinance a home loan with bad credit at some lenders, and the same four tests apply as for a purchase: the type of listing, the amount, whether it's paid, and its age. What's different is that the new lender will read how you've paid the loan you're leaving, month by month.

Clean repayments help in a practical way too. In its debt consolidation rules, Firstmac relies on comprehensive credit reporting and your Equifax score, instead of statements, to confirm debts being refinanced were paid well, but only where every borrower has a satisfactory score and the report shows no defaults, or only a non-financial one that meets its rules [1]. With a default on your file, expect to supply the statements.

More on moving lenders on refinancing your home loan.

If you're behind on repayments right now

If you're behind on your repayments now, a new loan usually isn't the answer, and most lenders won't approve one. One lender we've read won't release cash out for "meeting repayments on existing commitments" [2].

Talk to your lender about hardship first: lenders have teams for this. The National Debt Helpline offers free financial counselling on 1800 007 007 [5].

Can you consolidate debts with bad credit?

Consolidating debts into a home loan with bad credit is harder, because the lender wants to see that the debts you're rolling in have been paid well. Firstmac accepts debt consolidation where those debts have been well conducted [1].

Limits apply even with a clean file. The second lender we've read will consider consolidating unsecured debts with combined limits up to $50,000, at 80% of the value or less, and won't consolidate unsecured debt at all above 80%. It also won't release cash out to consolidate large unsecured debt or to pay a tax debt [2].

MoneySmart warns against consolidation firms that aren't licensed, ask you to sign blank documents, or won't put the costs and rate in writing before you sign [6]. More on debt consolidation home loans.

Can you get a home loan after bankruptcy?

A home loan after bankruptcy is a decline at both lenders whose full credit policy we've read. Firstmac declines any history of bankruptcy or a bankruptcy petition [1]. The second lender treats bankrupts as unacceptable outright [2].

Neither of those policies names a debt agreement (a Part 9 agreement), so we don't guess how they'd treat one. Which lenders will consider a file after bankruptcy or a debt agreement, and after how long, is something we check against each lender's current policy for you, rather than answer from memory.

Court judgments, writs and tax debt

A court writ is a decline at Firstmac, and a judgment or a writ is unacceptable at the second lender we've read [1][2]. If a judgment is wrong, or has been paid, that's worth raising before any application.

A tax debt doesn't always show on your credit file, but lenders ask about it and want to see any payment arrangement. One lender we've read won't release cash out to pay a tax debt at all [2]. More on self-employed home loans.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've read how lenders read a credit file. Now there's one question left: where does your file sit today, and is it cheaper to borrow now or to wait for a date you can name? That's what Money Brain works out with you before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.