How to get a home loan with a bad credit score?

Getting a home loan can be a challenging task, especially if you have a bad credit score. That being said, if you have your finances in order—and your credit score is a reflection of difficult life circumstances where you missed payments—then your less-than-ideal credit history does not necessarily mean you're ineligible for a home loan.

Lenders generally rely on credit scores to assess an individual's creditworthiness and determine the terms of a loan, but this is only one factor. Lenders will generally also consider things such as your income, expenses, and existing loans. 

With careful planning and strategic steps, it's possible to improve your chances of securing a home loan, even with a bad credit score. Here’s what you need to do…

1. Know your credit score and history

If you don’t know what your credit score is, the first thing you should do is get a copy of your credit report from credit reporting agencies such as:

• Experian: call 1300 783 684
  

• Illion: call 132 333
  

• Equifax: call 138 332
  

Understand the factors contributing to your low credit score and identify any errors or discrepancies that can be corrected. At the very least, being aware of your credit situation is important for knowing what you need to do to improve it.

2. Improving your credit score

While it may take some time, improving your credit score is one of the best things you can do to improve your borrowing power. One of the first changes you can make—if you haven’t begun doing so—is to pay your bills on time and reduce your overall debt. 

Additionally, if you can, avoid taking out any new loans and maintain a low credit utilisation ratio. Over time, these responsible financial habits can help raise your credit score. Yes, you can’t undo the past, but if lenders see that you’re on the right track, they’ll usually take that into account.

3. Save for a larger deposit

Part of having a poor credit rating is that banks will generally require you to have a larger initial deposit for your home loan. By saving up more money to put towards your home, you demonstrate financial stability and reduce the risk for lenders. 

You should generally aim for a deposit of at least 20% of the property's value, although if you can it will help to save more. Unfortunately, having a bad credit score means that the banks see you as a risky investment, so a larger deposit is one of the ways you can make yourself a “safer” borrower. 

4. Seek professional guidance

Consulting with a financial advisor can provide valuable insights into your home loan options. Having an expert evaluate your financial situation and give you personal advice might be just what you need if you’re struggling with bad credit. 

Keep in mind that, while a bad credit score presents challenges when obtaining a home loan, it doesn’t mean you’ll never get one. By taking proactive steps to improve your credit score, saving for a larger deposit, and seeking professional advice, you can increase your likelihood of securing a home loan. 

Patience and persistence are essential, as the journey towards improving your credit score may require a lot of time and effort. However, if you’ve already gotten to a point where you’re ready to take out a home loan and don’t know which lender to go with, then you’re in luck. At Mozo, we have a range of home loan providers on our database that you can compare so you get the loan that works best for you.