Credit Impaired Options A credit impaired loan is a type of mortgage that is offered from a non-conforming or specialist lender that can consider various situations, but in particular those which have had a poor history with credit in the past, be it a default listing or late repayments on existing loans . It is designed to help “outside of the box” applications from regular people who don’t meet the bank’s normal lending guidelines.
Who can qualify for a home loan?
Credit impaired home loans are generally designed for borrowers who have had a negative experience such as a divorce, loss of job, injury or business failure which has then caused 'black marks' against their credit history as a result of not being able to service their existing or past commitments.
What is considered to be “bad credit?”
There are many different types of impaired credit but the main types are:
- Mortgage arrears: Missed payments on your home loan. The more missed payments you have had in the last 6 months then the more wary lenders will be. Generally banks will not refinance your loan if you have missed just one repayment
- Bad credit history: Adverse listings such as defaults, bankruptcy, judgments, court writs or too many credit enquiries on your Veda Advantage credit file.
- Lender credit history: Your past credit history with the lender you are applying for.
- Unpaid bills or tax: Outstanding bills such as council rates or late tax bills are a type of bad credit history that may not initially show up on your credit file but may be visible on the supporting documents you need to provide to get a loan.
- Overcommitted: If you have too many debts for your income or your total assets are less than your total liabilities then the major banks may assess you as being insolvent or beyond help.
How do non-conforming lenders work?
Non-conforming lenders are far more flexible than the major banks. The interest rates that are offered reflect the risk that will the Lender will undertake – therefore, the higher the risk of your new loan not being managed then the higher the rate the lender will charge you, based on past credit history.
They will assess your home loan application on a case by case basis will consider the circumstances as to what went wrong and why you need debt relief.
Generally if you are borrowing below 80% of the property value then you can get a cheaper interest rate.
- For those of you who are looking to borrow over 80% or if you have had severely impaired credit histories then the rate can be much higher.
Low doc loans with bad credit
Credit Impaired providers will consider applications from self employed borrowers who need a lo doc loan because they cannot prove their income using financials and tax returns. In some cases they can help start up businesses for people who have an ABN that has been active or GST registered for less than 2 years.
They can accept lo doc loan applications with an unpaid default, mortgage arrears, judgments and even discharged bankruptcy. Generally you will sign an income declaration or provide an Accountants letter to prove your income. As this is a specialised area of lending with very few providers therefore rates are considerably higher for lo-doc as opposed to income-verfied applicants
Solution focused lending
The premise of home loans for people with bad credit is that it's a short-to-medium term fix, not a long term solution.
The intention will be to refinance back to a 'standard' lender in around 2 – 3 years time when your credit history is clear again. Why?
You will need to repay your bad debts, clean up your credit file and then once you have a proven track record of repayments on your mortgage with no arrears you can refinance to a better interest rate.
- The objective is to help you make a fresh start and allow you to keep your home. You can have a 25 or 30 year loan term that way you are never forced to refinance in a particular timeframe.
- This stops people being caught out if their personal situation changes.