It happens to almost everyone eventually. You walk into the bank and ask for money, either to buy a car, house, or business. But the bank declines you. Today we’ll look at what to do if the bank declines a home loan for your next investment property due to your credit score.
Typically, the three main questions a bank will ask are:
In “The Successful First Home Buyer”, Mortgage Lab founder Rupert Gough suggests that any home buyer should check their credit report long before applying for a mortgage. But almost no one does, and it’s not surprising. Our credit reports are invisible in our day to day and for most of us, we can be pretty sure we know what’s on our report, so why even bother to check?
But we have all moved house. Maybe we were flatting with someone who said they would close the power account and didn’t. Or we’ve spent six months overseas and forgot to cancel the gym membership before we left. It happens to the best of us, and when you come to need a mortgage, the bank is the first to tell you.
Understanding what’s recorded in your credit report these days is also important. There should be a record for every utility bill and credit card you have. It will state how promptly you pay it. “0′ means you pay it on time, 1 means “30-59 days late, etc.
So while you may not have an unpaid debt, the bank can still see how you manage your money.
If it is only a small default (generally under $1,000), then the first thing the bank will check is if it has been paid. If it is unpaid, this is usually an instant decline for your mortgage application. The bank assumes you either don’t take care of your finances or you can’t afford to pay the debt.
If you discover a small debt like this, getting it to a “paid” status will get you a lot further.
You, of course, have the right to dispute the debt. If you believe you gave notice to your phone company before skipping off to England, it’s essential you get this corrected. The debt will be marked as ‘disputed’ and should not appear on your credit report. Here is a good place to start with your dispute resolution.
Assuming your credit issue is more serious than a rogue gym membership, you need to decide what you’re going to do next. You have several options:
If you are a couple and one person has bad credit, purchasing the house under one person could be possible. This is tricky as it requires one person to afford the mortgage (on one salary) and afford the expenses of two people. But we’ve seen it done before
The application is a little easier if the house is bought in a trust. The applicant with good credit becomes the main trustee and the sole borrower. You’ll need to seek advice from a solicitor before choosing this approach.
Some lenders will happily lend to applicants with bad credit. Why happily? As with the income and equity hurdles, they price their interest rates accordingly. Typically the rates can be as low as 10% but can be in the 18% area if your credit is very bad.
Once paid, defaults are automatically removed from your credit history after five years. This makes sense. It’s unfair to saddle a person with bad credit for the rest of their life because of a situation they were in almost half a decade ago.
Bankruptcy is treated similarly to other serious debts; it remains for three years, at which point you are discharged. Once you have been a discharged-bankrupt for four years, you should be clear to apply for a mortgage with a clean credit report – a total of 7 years from initial proceedings. But if you’re applying to the bank that the original debt was with, their files go back longer than seven years and they usually aren’t as ready to forgive.
If your negative credit history is almost five years ago (or 7 in the case of bankruptcy), it may be worth waiting for the debt to be removed before reapplying with a main bank. In the past, it was possible the bank would approve a loan, given the negative history would disappear soon anyway. This is less likely now with credit tightening and the banks under strict responsible lending requirements. Most banks will request the client comes back once the debt is definitely removed from their credit report. T
This strategy works better if you already have your credit report before you consider applying for a mortgage. Once the bank knows you’ve had a default, even if it is four years and 11 months ago, they can’t “unknow” it. It’s better if we present you to the bank in the best light the first time.
As always, the first thing to do with a decline is to find out why. Get a copy of what they are seeing to understand exactly why you were declined. With this information, you should be able to make a good plan for where to go next. And when you’re ready for mortgage advice, get in touch.
It’s not always easy to get started. What do you need to know?
We’ve put together the most important things to know when you’re looking at buying your next Investment Property and we are giving it away for free.
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