Just because you might have bad credit, it shouldn’t discourage you from obtaining a home loan. In fact, lenders now provide flexible financing options specifically designed for individuals with bad credit, known as bad home loans or mortgages.
But this raises another question: can you obtain pre-approval for a bad credit mortgage? Let’s first take a look at whether you should consider a bad credit mortgage, and if pre-approval is right for you.
What constitutes a bad credit mortgage?
Not everyone can have a pristine credit history with a stellar credit score of 1000 or 1200 (depending on which credit bureau you use). Life, all too often, has other plans for us. Whether due to an unexpected job loss, an unfortunate medical emergency, or simply poor financial acumen, many people have bad credit. Any of these may lead to defaults, judgments, or even a bankruptcy, which will impair a credit report and significantly lower a credit score.
Australians have an average credit score of 685, based on the Experian 0-1000 credit score range, according to Finder.com.au. This falls into the “good” range, but as the average, that means there’s still a considerable number of people with a sub-550 credit score, which falls into the “weak” range.
Any potential borrowers carrying a “weak” credit score probably won’t qualify for a standard mortgage, and will instead need to rely on what’s called a bad credit mortgage. In this case, you’d simply have to show:
• Active income via self-employment or from PAYG
• A written letter explaining your credit circumstances
• Sufficient income and equity contributions
Once you provide this documentation, a specialist lending manager will assist you in finding flexible access to a cost-effective credit solution specifically tailored to your financial situation. With these types of credit instruments available, you can still purchase a nice home in a good area even if you have a “weak” credit score.
How does mortgage pre-approval work?
As the very first step of the home buying process, many borrowers seek to get mortgage pre-approval. This involves the potential borrower approaching a lender and applying for a mortgage before ever stepping foot into a house that’s for sale. Even those looking for a bad credit home loan can potentially obtain mortgage pre-approval. If all your documents are in order, the lender will then pre-approve you for a specific amount they’re willing to lend to you, based on what they assume will be your ability to repay it.
There are several benefits to getting pre-approved for a bad credit loan. First, you will know how much money the lender is willing to provide for the mortgage. Armed with this knowledge, you can make more informed decisions.
This also applies to where you focus your search to find a home. After all, why waste time looking at houses that are out of your price range or desired location? However, it’s also worth noting that sometimes bad credit mortgages have restrictions on where you can purchase a property.
Bad credit home loan pre-approval also gives you a bit of leverage over other house hunters looking into the same property. As a pre-approved borrower, you will have a better chance of closing the deal compared to those without pre-approval who still have to go through the loan application process.
If you’re thinking about getting loan pre-approval and you have bad credit, Redrock Group has a market-leading suite of bad credit home loans to help get you into your dream home. Talk to one of our specialist lending managers today for a personalised finance offer.