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Buying a house with bad credit: a guide to your mortgage options

If you’ve had to deal with financial hardship or simply forgot to pay some bills in the last five years or so, you may find it difficult to get a mortgage from a bank. In this guide we look at how you can end up with a bad credit record, what you can do about it and the options you may still have when it comes to getting a home loan.

What is bad credit?

In New Zealand, anyone who’s had a credit card, loan, or contract with a phone or utility company will probably have it all recorded in their credit history. If you’ve missed some payments or applied for too much credit, you could have what’s known as a ‘bad credit score’.
Who records my credit history?
There are three organisations that collect detailed information about your credit history. They’re known as credit reference agencies. These organisations use your credit history to create a credit report. Part of that report includes a credit score. It’s a number out of 1000; the better your credit history is the higher your score will be. Most people have a score somewhere between 300 and 800.
Who can see my credit history?
Organisations that provide loans, credit, insurance or contracted services can request your credit score and credit report from these agencies. Employers, landlords and rental agencies may also ask for a credit report to see how reliable you are at paying what you owe. Most organisations or individuals who want to check your credit history need your permission to do so. However, debt collectors and some government agencies don’t need your consent.
Who decides I have bad credit?
Bad credit, or a bad credit history, usually means you have missed several payments or defaulted on a loan at some stage in the last five years or so. If you’ve been declared bankrupt, it will be part of your recorded credit history for much longer. If your credit history makes you look too risky, your application for a loan or a contracted service may be declined. In other words, it’s the people you’re applying to who will really decide whether you have bad credit.
What is a bad credit score?
There’s no standard credit score for this. Each organisation you apply to will have its own criteria. In addition, each of the credit reference agencies that provide credit scores has its own way of calculating them. There’s no universal New Zealand score. However, a score over 700 is usually considered good, 500 to 700 is average, and below 500 is a poor or bad credit score.
How can I check my credit score?

You can check your credit score for free, but some credit agencies charge if you need it urgently. Here’s a link to each of New Zealand’s credit score providers.

  • Credit Simple, by ilion, to get your score for no charge as soon as you sign up
  • Centrix for a free credit report the next working day if the ID you provide is a New Zealand driver licence or passport details, or 5 to 10 days for other types of ID
  • My Credit File, by Equifax, to get a free online report within 10 days

What is my credit score affected by?

Some of the things that influence your score will seem obvious, but there are a few that may surprise you. While they each alter your score to a different degree, they’re all events that generally indicate how well people manage their money.

Your score will be positively affected if you’ve had credit approved in the past and not used it all, for example by fully repaying the closing balance on your credit card each month. It will also increase if you’ve never missed a loan payment and always paid your bills on time. You score can even increase simply because you’ve become older.

If your credit score is lower than you expected, it may be due to one or more of these things:

  • You’ve never applied for a credit card, loan or utility contract, so your risk is unknown
  • In the last five years or so, you have bills or loan payments that were paid late or are still owing
  • A flatmate or partner was meant to pay a bill or loan that was in your name, but they didn’t
  • You used one credit card to repay the amount owing on another
  • You made several applications for credit in a row with little time between them
  • A debt collector has been asked to recover what you owe
  • You asked a lender for financial hardship assistance with your loan payments

Why is it difficult to get a first home loan when you have bad credit?

Most mortgage providers, such as banks, are simply lending you money they have borrowed from other people, albeit at a lower interest rate than they will charge you. They have an obligation to protect their depositors’, investors’ and wholesale lenders’ money and ensure the required interest is paid on time.

As a first home buyer, you’ll have no record of managing a mortgage well. If you also have bad credit, you’ll appear to have a higher risk of not being able to make your mortgage payments on time. If you ever miss a mortgage payment, it will start a process to help you get things back on track. But if you’re not able to recover, it could eventually mean the lender has to take possession of your home and sell it to recover what you owe. This is known as a mortgagee sale.

As much as a lender might want to help you into your first home, it would be irresponsible of them to put you in a situation that could mean you lose it. Depending on the sale price, you could also lose some of the money you’ve already paid into the home. But having bad credit doesn’t necessarily mean they won’t lend to you at all.

How do you get a first home loan if you have bad credit?

If you’ve checked your credit report and you have a poor or bad credit score, it can help to get some trusted professional advice on the best way forward. One option is to find a mortgage broker you feel you can work closely with. Look for one who provides realistic options, rather than critical judgement, and seems to have your best interests at heart.

It may be that your best option is to spend a year putting things right and increasing your score. If so, you’ll at least have experienced advice on how best to do that. Your broker may also help you stay on track and you’ll have a trusted ally when it comes to eventually applying for your first mortgage.

A mortgage broker or home loan adviser understands the criteria New Zealand’s banks and other lenders use and what they’re looking for in potential customers who have a few issues in their credit history. Once you’ve chosen a professional to help, it’s important to arm them with as much information as possible. Make sure you’re open and honest, so they can develop the best strategy from day one.

Try to be open to their advice, rather than defensive. Focus on solutions, rather than problems, and treat this as an opportunity to improve your financial knowledge and skills. Admitting there was a problem, taking ownership of it and focusing on putting things right are all things a mortgage lender will be looking for when considering your application.

Mortgage options for people with bad credit

If you’ve got a poor or bad credit score, most mortgage lenders will probably want to understand more about how that came about and whether things have changed for the better.

If things aren’t too bad, they may still lend to you but reduce their risk by offering to lend a smaller percentage of the home’s value. That means you’ll have to provide more than the usual minimum 20% deposit. They could also charge a higher interest rate. The good news is you can usually ask for a review after one year. Provided you’ve met your mortgage repayments and any other credit payments on time, they may agree to refinance your home loan at the standard interest rate. If this happens and you can keep up the same regular fortnightly or monthly payments, it would be a great opportunity to pay back your mortgage faster and save thousands in interest over the life of your loan.

Mortgages from non-bank lenders

If your credit history means the main banks are not willing to lend to you, there are other types of lenders and home loans you could consider. One group is known as ‘non- bank lenders’. As the name suggest, these are financial institutions that provide loans but don’t have a New Zealand banking licence.

About two percent of New Zealand’s mortgages are provided by non-bank lenders and this percentage is growing. Examples that offer long-term mortgages (25+ years) include Liberty Financial, Resimac Home Loans, Pepper Money and Avanti Finance. Non-bank lenders have a little more flexibility than registered banks. For example they’re not affected by the Reserve Bank’s loan-to-value ratio (LVR) restrictions. They offer similar loans to bank mortgages, however the fees and interest rates are usually higher, unless you nearly meet the criteria traditional banks require. Some non-bank home loan providers only deal with mortgage brokers, but not all.

How to fix a bad credit score?

Whether you manage to get a mortgage approved or not, if you have a bad credit score there are ways to improve it. In New Zealand, the credit reference agencies that record your credit history and calculate your credit score are required to take positive actions into account, not just the negative ones. Here are some examples of how you might be able to boost your credit score and make getting a mortgage or refinancing in the future much easier.

Go through your credit report and make sure there are no incorrect events on it. Focus on things like credit score enquiries from lenders, current and repaid loans and credit accounts, and any default payments. If there are any you don’t recognise or remember, be sure to ask the credit reference agency for more information. It’s rare, but someone could have stolen your identity details and used them to get a loan or a utility contract in your name.

Take a close look at your finances over the last six months or so. Could you reduce what you owe in any way? Check your loan documents and utility bills to make sure you haven’t missed any payments. If you’ve had any court fines, make sure they got paid. If you can’t repay what you owe, get help from a budgeting service and let the people you owe money to know that you’re doing the best you can to pay them back.

If you have several loans, ask a financial adviser about replacing them all with a single low-interest loan and set up automatic repayments to pay it off as soon as you can. This is called debt consolidation.

Scenario 1: Non-bank lender comes through

Sarah moved to a small Northland town to work as a surf instructor and personal trainer at the local gym. Homes just outside the town were relatively affordable and a two-bedroom cottage down an unsealed road had just come on the market.

Sarah contacted her bank about getting a mortgage, but they declined. They said she had a bad credit score, mainly due to overdue credit card payments some years ago. A friend suggested she try a mortgage broker, which she did.

Long story short, the broker found a non-bank lender who was willing to provide a 25-year mortgage at a slightly higher interest rate for the first year at least. Sarah is loving her new cottage, growing most of her food and working hard to show the mortgage provider she’s a low risk by the time her annual mortgage review comes around.

Scenario 2: Credit score comes right in a year

Luke went a bit off the rails in his twenties, but with the help of a mentor he’s got things back on track and is now a qualified plumber employed by a well-known company. He’s living with his partner Ruby and they are keen to get into their own home.

With their KiwiSaver and help from parents, Luke and Ruby have the deposit for a small home unit. They met with a mortgage broker who checked their credit records online. Roby’s credit score is good, but Luke has a bad score resulting from several unpaid bills four years ago.

After listening to their broker’s advice, Luke and Ruby have decided not to apply for a home loan, as it would probably just add a declined application to his record. Instead, they’ll wait a year until the unpaid bills no longer show on Luke’s record or affect his score. In the meantime they’re budgeting carefully and avoiding further debt. Luke and Ruby are also putting the difference between their rent and what their mortgage payments would have been into a savings account every fortnight. That way, by the time they apply for a mortgage, they’ll have a solid savings record, larger deposit and proof they can afford the mortgage payments.

Don’t let bad credit get you down

If you’ve had financial troubles in the past, the future could still deliver your dream of owning an investment property or buying a first home. The best way forward could be to find out where you stand, by checking your credit score, then having a chat with an expert (non-bank home loans adviser or mortgage broker). With the right sort of help, you can work out a strategy that leads in the right direction.

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