Bad credit home loans tend to require a higher deposit because they’re riskier for the lender. Mortgage insurers are less likely to provide cover for borrowers with bad credit history, and lenders see applicants without insurance as a potential red flag. By requesting a higher deposit, lenders take steps to protect their investment.
What level of deposit do you need for a bad credit home loan?
Lenders look at many things, including the types of previous and existing debt, how quickly it was paid off, and what sorts of debts the borrower accrues. One of the trickiest things for borrowers seeking a bad credit home loan is that all specialist mortgage lenders have their own set of criteria for assessing applications. One lender might see utility defaults as fairly minor, while others might categorise them as serious. As a result, different lenders expect different levels of deposits and offer varying interest rates.
However, one thing that’s typical of all lenders, is that the higher the deposit on a bad credit home loan, the better the interest rate. The reason for this is two-fold. Firstly, the lender is aware that a someone with bad credit history may be more likely to default on their payments, and by asking for a higher deposit, they stand to lose less if the property has to be sold on.
Additionally, for loans of more than 80 per cent of the property value, borrowers must be approved for mortgage insurance. As mortgage insurers usually want to avoid risk, they are less likely to approve someone with bad credit history. Lenders can compensate for this by asking for at least 20 per cent of the property price as a deposit. If a lender is willing to loan above an 80 per cent loan-to-value ratio (LVR) without mortgage insurance, they require a higher interest rate to ensure they make some money.
How to make applying for a bad credit home loan as simple as possible
Choose your lender wisely – For borrowers with bad credit history, choosing a lender who doesn’t credit score is key. If they do, they should at least do a personalised, human version, not a computerised system that simply authorises and declines an applicant based on a number.
Make changes to your spending – Older defaults tend to be treated more favourably than recent ones. While you can’t do anything about existing defaults, you can build a good credit score from now on to improve your rating over time.
Increase your deposit – Most lenders treat an application according to the LVR. If you can muster together a larger deposit, you should attract lower interest rates, despite a poor credit history.
Be employed when you apply – Someone with a steady income is less likely to default again, so mortgage lenders tend to prefer an employed applicant with a poor credit score than someone who still has no stable means of making payments.
Pay outstanding debts – As well older defaults being preferable to recent ones, mortgage lenders also prefer to see debts that have since been paid, showing the applicant does deal with their credit issues when they can.
Use a specialist broker – It can be overwhelming to sift through all the possible mortgage lenders available to you and work out who approves bad credit loans. A specialist lending mortgage broker is already familiar with all the lenders that work without credit scores and how they assess their applicants. They can save you time and plenty of stress.
Red Rock Mortgages are experts in specialist lending and have a range of products to suit a variety of situations. Visit our website to learn more about our specialist lending solutions.