Buying a home can be stressful at the best of times. And for those with past credit problems, owning their own home may seem like an impossible dream to achieve. The good news is that there are lenders out there who will be willing to give borrowers a second chance, provided they have acceptable explanations about blemishes on their credit reports.
Blemishes on Your Credit Report
There are many reasons why people have bad credit, and not always is it caused by irresponsible behavior. Whether it’s from involuntary unemployment, divorce, injury or illness, credit blemishes are often a part of life. The good news is that they no longer have to prevent you from becoming a homeowner.
Clean Up Your Credit Report
Before applying for a home loan, the first thing to do is to order a copy of your credit report. You have the right to find out what’s in your credit report and correct any wrong information. You can receive a free copy once a year if you can wait 10 days. You may have to pay if you need the report faster.
You can get a copy of your credit report from these credit reporting agencies:
Veda.com.au PO Box 966, North Sydney NSW 2059 firstname.lastname@example.org 1300 762 207
CheckYourCredit.com.au (Dun and Bradstreet) PO Box 7405, St Kilda Rd, Melbourne, VIC 3004 email@example.com 1300 734 806
Experian Credit Report GPO Box 1969, North Sydney, NSW 2060 firstname.lastname@example.org 1300 783 684
Tasmanian Collection Service GPO Box 814, Hobart TAS 7000 email@example.com 03 6213 5555
If anything is incorrect or found to be inaccurate, filing a dispute with the credit reporting agency can help to get the information corrected before speaking with a lender.
Providing explanations about the items on your credit report and learning how to prepare for your loan application could help you make home ownership possible.
Prepare Documents and Proof
Since you will be signing a privacy form for your lender to review your credit and make inquiries, it is best if you go in prepared for questions that will be asked by the lender. Review your report carefully and makes notes about any negative items listed. This information can then be presented to the lender along with your home loan application. The type of information that can help explain negative listings on your credit report may include the following:
Proof of Unemployment: If you were unable to pay your bills during periods of unemployment, having proper forms and letters from your former employer can help.
Proof of Divorce: Financial agreements or consent order to proof which party was responsible for which debt, to demonstrate the financial problems that may have occurred during a divorce.
Proof of an Accident or Illness: A letter from your GP to confirm any long term illness etc
Re-establish Credit Worthiness
After establishing the reasons for your credit issues, the next step is to prove to the lender that you have the financial means to purchase your home and to make your repayments on time every time. Establishing credit-worthy behaviour is not as difficult as you may think, even if you have had a prior bankruptcy, foreclosure or other financial difficulties. Here is a list important factors that your lender will look at while assessing your application:
Stable employment – Your employment must be stable over the last twelve months. This means same type of employment with the same employer.
Stable bill payments – During the last 12 months, you must have been making regular payments (on time) on any outstanding bills. Establishing a strong record of timely payments is the goal. A letter from the real estate agent or landlord confirming you have paid your rent on time would be also very helpful.
Deposit– Today there are lenders out there who will accept as low as a five percent deposit, but those with past credit problems may be required to shell out up to twenty to forty percent for a down payment on their new home. A buyer who pays a larger down payment obviously has more vested interest in the home and may, therefor, be less likely to default on a loan. Lenders to fund credit impaired loan usually have a tiered interest rate structure, meaning the higher the loan to value ratio, the higher your interest rate.
Before you start searching for a home, you should research all available option and most importantly enlist the help of a qualified mortgage broker.