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Can you get a home loan with bad credit?
Yes, it’s possible to get a home loan if you have a bad credit history. Rather than solely focusing on your credit score, bad credit lenders assess your overall financial position, such as your income, employment history, and loan-to-value ratio (LVR).
Bad credit home loan options are available for various types of borrowers, including first-home buyers, refinancers, and investors.
In Australia, bad credit home loans may be available to borrowers who:
Have an average (460 to 660) or below average credit score (0 to 459)
Have paid or unpaid defaults on their credit file
Have multiple credit enquiries on their credit file
Have a mortgage in arrears
Missed or made late payments on credit cards, personal loans or utility bills
Have previously been bankrupt
Are involved in or exited a Part IX Debt Agreement
Have any judgements or court writs
Have a large debt with the Australian Taxation Office (ATO)
Home loans for bad credit borrowers: How they work
A bad credit home loan is an alternative finance option for borrowers with credit issues or a limited credit history — and therefore who don’t qualify for a traditional home loan application with a mainstream lender. This could be because of small dishonours or serious credit infringements.
The catch is that bad credit home loans have higher interest rates (up to 1.5% higher) than a standard mortgage to offset the lender's risk of financing non-conforming borrowers. Some lenders may also charge an additional risk fee — typically calculated as a percentage of the loan amount (e.g.1-3%), depending on the product and lender. This fee can be paid upfront or added to the loan.
Your mortgage broker may recommend using a bad credit home loan as a stepping stone into the property market and then refinancing with a mainstream lender at a lower interest rate once your credit situation improves. In some cases, they may recommend waiting until you have built up some savings and improved your credit history, especially if you have recent defaults on your credit file.
Who’s eligible for a bad credit home loan?
Minimum eligibility criteria vary between bad credit lenders, but generally include:
- Australian citizenship or permanent residency
- You must be over 18 years of age
- You must provide sufficient documentation that demonstrates your ability to repay the loan
Bad credit home loan vs standard mortgage
A bad credit home loan works similarly to a standard mortgage, with a few key differences:
- Bad credit home loans have more lenient eligibility criteria, as specialist lenders primarily consider overall loan serviceability, with less focus on credit history.
- You may need to contribute a higher deposit — usually 20% of the property’s value — to reduce the loan-to-value ratio (LVR) to 80%. However, some lenders will accept a 5-10% deposit, depending on the property and area you’re buying in.
- Alternatively, you may need a guarantor (usually a family member or parent) to offer some of their home equity as additional security for your loan.
Bad credit home loans pros & cons
- Allows you to buy a home sooner, while working on improving your credit score at the same time
- Bad credit home loans come with features that can help you save on interest and access extra repayments, such an offset account and redraw facility
- You may be able to eventually refinance to a lower rate if you make your repayments on time and your credit situation improves
- Higher interest rates compared to standard loans, plus an additional risk fee may apply
- Bad credit home loans may have limitations on eligible properties and postcodes (e.g. application for off-the-plan purchases may be denied)
- If your loan application is rejected, it could further damage your credit score
How to apply for a bad credit home loan
1. Review your credit file
Request a copy of your credit file from one of Australia's main credit bureaus (Experian, Equifax and illion). You’ll be able to review the information to see if any issues can be fixed right away (e.g. settle any outstanding defaults), and you’ll be able to pre-empt any questions your lender may have about your credit history.
2. Work with a mortgage broker who specialises in bad credit home loans
If you’re a borrower with adverse credit, consider working with a mortgage broker to help facilitate your loan application and give you the best chance of getting approved.
You’ll be asked to initially fill out a Fact Find sheet to help the broker better understand your financial situation and goals. After that, they will come back with a selection of loan products you would qualify for based on their knowledge of the eligibility criteria of various lenders.
3. Submit a loan application (through your broker)
Your broker will handle the whole application from start to finish (settlement). To help make the process seamless, you’ll be asked to submit your supporting documentation directly to the broker, who will review it (to ensure there are no nasty surprises) and forward it to the lender as part of the loan application.
The documentation required for your application will vary depending on the lender and the specific loan product you’re applying for, but typically, you'll need to provide:
- Two latest payslips
- Bank statements for the last three months demonstrating genuine savings
- Recent tax returns or notice of assessment from the ATO
- Proof of your assets (e.g. savings, shares) and liabilities (e.g. other loans)
- 100 points of ID (e.g. driver’s licence, passport)
4. Get pre-approved for a bad credit home loan
If your application meets the lender's criteria, they may grant pre-approval. This is when a lender agrees ‘in principle’ to lend you a specified amount (provided your financial circumstances don't change), allowing you to shop for properties with a clear budget in mind. Having pre-approval also signals to real estate agents that you are a serious buyer.
5. Get unconditional approval
Once you’ve signed a contract of sale for a property, the lender will order valuation of the property to determine your LVR and ensure the property is acceptable security for the loan. If everything is above board you may be granted unconditional approval.
Your lender will send you a loan offer letter outlining the terms and conditions of your bad credit home loan. Discuss the loan offer with your conveyancer or solicitor before you sign it.
Bad credit mortgage lenders in Australia
Here are some of the main bad credit mortgage lenders in Australia:
- Bluestone
- La Trobe Financial
- Liberty
- Pepper Money
- RedZed
- Resimac