Can I get a mortgage with bad credit?

Updated 26 March 2024

If you are wondering if you can get a mortgage in Australia with a bad credit score, the answer is yes, you can. There are factors to consider, such as the time it will take to get a home loan and steps to improving your credit score.

People with bad credit can face more difficulties and risks to get a loan compared to those with good credit. It could also be more expensive.

Let’s take a look at how bad credit home loans in Australia work.

What is bad credit?

First, you should know what would be considered bad credit. A credit rating of 500 or lower is bad credit in Australia, according to credit bureaus Experian and Equifax.

What affects your credit score?

Below is a list of activities that could negatively affect your credit score:

• missed or late payments on bills, credit cards, or loans
• court judgments, writs, and summons
• defaulting on loans
• unpaid defaults
• mortgage arrears
• declaring a bankruptcy
• applying for multiple loans in a short period of time
• applying for multiple credit cards

To improve your credit score, watch this video:

Here are some expert strategies on managing your credit score from Victoria Coster, MPA Elite Women for 2023 awardee.

What is a bad credit home loan?

Bad credit home loans are mortgages offered by specialist lenders or non-conforming lenders in Australia. A bad credit home loan was designed for people with poor credit scores.

In Australia, there are two kinds of bad credit home loans that lenders look at:

Paid defaults

These are defaults that a person has not paid in full.

Unpaid defaults

An unpaid default shows up on a credit file as:

• an overdue account like a phone bill
• a credit card bill
• a personal loan
• utility bills

An overdue payment happens when:

• you have a payment that is 60 days late; or
• if a lender has not been able to get in touch with you

Most major banks in Australia decline home loan applicants if they have a default on their credit files. Lenders see defaults as a sign that the applicants in question cannot pay their debts.

Specialist lenders and non-conforming lenders consider applicants who have these defaults.

Can you get a home loan with bad credit?

Yes, it is possible to buy a house in Australia even if you have bad credit. Aside from your credit history, there are other aspects you need to consider when you apply for a home loan:

• income
• expenses
• employment
• how much you want to borrow
• how much of a deposit you have

Australian lenders are required by law to lend money responsibly. They won’t grant you a loan if they think you wouldn’t be able to repay it. Overdue payments, defaults, or marred credit reports could get you rejected.

Not all defaults are treated the same way. If you have a smaller default, an old default, or a paid default, some lenders can be lenient.

If you really want to buy a house while having bad credit, consult a specialist lender who provides bad credit home loans.

What bad credit home loans are available in Australia?

There are five types of available bad credit home loans in Australia. Each of the bad credit loan types is designed for specific situations and needs, so speak to an expert first.

1. Default home loans

This is probably the most common type of bad credit home loan. Under this, some lenders will look at your paid and unpaid defaults on your credit report. A default occurs when you fail to pay a bill amounting to over $150 60 days after the due date.

A default stays on your credit report for five years after the debt’s due date even if you have paid it since. Although defaults cannot be erased from your credit report, they show up as either paid or underpaid. To convince a lender of your creditworthiness, it is advisable to repay your default.

2. Discharged bankrupt home loan

Events leading to bankruptcy include:

• relationship breakdown or divorce
• credit card debts
• unemployment
• mental or physical illness
• bad business decisions

When a person becomes bankrupt, they become a so-called “undischarged bankrupt,” which means they are still working on the process of insolvency.

This usually lasts for three years, during which a trustee nominated by the Australian Financial Security Authority manages the financial affairs of the bankrupt person.

Once done, the person becomes a “discharged bankrupt.” Borrowers considered discharged bankrupts can apply for the discharged bankrupt home loan.

Discharged bankruptcy home loans are often used as a stepping stone to help formerly bankrupt individuals get back on their feet. After a person makes solid payments for a significant period, the loans can be refinanced to a prime loan.

It’s not impossible – here's how a broker helped a discharged bankrupt get a home loan.

3. Tax debt home loan

The tax debt home loan is for individuals with a large debt with the Australian Taxation Office (ATO). In this case, the ATO debt is added to the mortgage, leaving the borrower clear of any ATO debt.

The catch is that the borrower needs to pay interest on that ATO debt because it is rolled into the home loan. If the borrower communicates with the ATO directly, the office usually provides repayment options with minimal interest payable.

4. Debt consolidation home loan

This type of home loan is for people who have many small unsecured debts that they cannot manage. This would include credit card debts and other personal loans.

They can roll all these small unsecured debts into one package known as a debt consolidation home loan. As a result, it becomes easier for them to manage the consolidated debt because they only need to make one repayment.

Many people in Australia go for the debt consolidation home loan, rolling their multiple unsecure debts into their mortgage to make one monthly repayment. There is also the possibility of repaying this consolidated debt at a lower interest rate than one found on a personal loan or credit card.

5. Part 9 debt agreement loan

A Part 9 debt agreement loan is a legal arrangement that allows you to start repaying what you owe. This is an option to declaring bankruptcy. You can apply for a home loan even if you are under a Part 9 debt agreement plan, but getting approved will be challenging.

Lenders will view your Part 9 debt agreement as proof of inability to pay. This makes you high risk, which may result in outright disapproval or higher interest rates.

Eligibility criteria for bad credit home loans

The different types of bad credit home loans cater to different situations and financial histories. They are designed to meet a borrower’s needs, whether they are first-home buyers, refinancers, or investors.

These are the basic criteria:

• over 18 years old
• Australian citizen or a permanent Australia resident

Your eligibility for a bad credit home loan mainly depends on your capacity to meet the loan repayments.

Australian lenders are required to follow the country’s responsible lending rules under the National Consumer Credit Protection Act of 2009. Under these rules, lenders need to assess home loan applications based on the following:

• income
• expenses
• other debts and assets
• loan amount
• your loan-to-value ratio
• security for the loan or the property being bought

How to apply for a bad credit home loan

There are 6 practical steps to take before you apply for a bad credit home loan. It starts with the basics: get an overview of your credit score.

1. Check your credit score and credit report

The first step is to review your credit report. Sometimes, a bad credit score is just because of errors in a report that can be fixed.

Home loan expert Mansour Soltani of money.com.au suggests checking when information was added to a credit report. Based on this, the borrower will need to work out how soon it can be removed.

Knowing this can influence whether a borrower chooses to apply for a home loan now or wait. Defaults can remain on a credit file for a couple of years.

One can request a copy of their credit report every three months. The copies can be taken from Australian credit bureaus like Experian, Equifax, and illion.

If you need help with raising your credit score, here are six ways you can do that.

2. Settle any outstanding debts

Bad credit home loan providers will want to know your outstanding debts and financial history so they can address the issues you might have made in the past. This also allows them to ensure that defaults are paid and that you can make the repayments for your home loan.

3. See if you need a credit repair service

There are some negative bad credit listings that can be removed from your credit file. A credit repair specialist can help with this, especially if you have bad listings that can be removed.

If this happens, you then can avoid the higher fees and interest rates that come with a bad credit home loan.

4. Coordinate with lenders or mortgage brokers

You should first speak to various lenders to discuss your situation and home loan options before applying.

Speaking to lenders or brokers will give you a better chance of being approved for a bad credit home loan. This also allows you to compare the rates and loan features offered by different lenders.

Below are some of the bad credit loan providers in Australia:

• Blue Fox Finance
• Bluestone Mortgages
• Fox Finance Group
• La Trobe Financial
• Liberty Financial
• Pepper Money
• Rapid Finance Australia
• Redrock Group
• Resimac

Look for a specialist lender that can see beyond the numbers. Nonconforming lenders will check your credit file and know that bad credit can be because of various reasons like divorce or illness. They will then consider your income and other factors to grant you a loan despite the negative listings on your credit file.

5. Make an application

Most bad credit home loan applications can be done online and quickly if you have all the information needed.

You will need to submit documentation for your application. Some requirements might include:

• an Australian passport or a valid Australian permanent residency visa
• recent bank and loan statements
• proof of assets

For Pay As You Go employees, you will need recent pay slips and a letter of employment as part of your application.

For self-employed home loan applicants, you need to submit the following:

• proof of Australian business number and goods and services tax registration
• business bank statements
• recent tax returns, notice of assessments, and financial statements
• declaration of financial position with your accountant’s signature

6. Submit the property’s valuation

The specialist lender will give you conditional approval if they are happy with your application, but the final step requires you to submit a valuation of the property you are buying.

The property will be used as security for your loan, so the lender will only grant you full approval if there is enough evidence that the valuation is high enough so that the loan-to-value ratio on the loan is lower than the maximum it allows.

Taking the first step in getting a bad credit home loan

If you have a less-than-ideal credit history, all hope is not lost. Getting a bad credit home loan is an option but do your research to help you make informed decisions. Understand your options – from eligibility criteria to the types of loans available and their caveats.

This is an important step, so seek the advice of mortgage experts to guide you. Our Best in Mortgage section has a listing of the best names in Australia’s mortgage industry, from brokers and aggregators to lenders and banks. Make this your first move towards fulfilling your dream of home ownership.

Do you think that getting a bad credit home loan is doable? Let us know in the comments.