Bad credit home loans: when your bank says no

If repayments or essential bills are unaffordable today, start with your lender's hardship team or the free National Debt Helpline on 1800 007 007. A new loan is only useful if you can afford it.

Already own a home, but the mortgage, cards and other repayments are taking too much of your pay? Our debt consolidation guide compares the monthly relief with the total cost of putting those debts into your home loan. If your credit history is making it hard to switch lenders, start with refinancing with bad credit.

Before you apply again, find out what stopped the last application. You may need a different lender, a correction to your report or time to get back on track. Sending the same application to another bank can simply add another enquiry.

Lenders look at your credit file, not just your score. A default, missed repayments, a hardship arrangement or a run of recent applications can all affect the answer. Bankruptcy and Part 9 agreements have their own rules.

Start with your credit reports, including the one the lender used. Check who listed each debt, how much it was for, the dates and whether it shows as paid. Different reporting bodies can hold different information.

Check these 4 things on your report and application:

1. Is the information accurate? If a listing is wrong, dispute it before you apply.
2. Is it resolved? Paid, closed and completed are different from still overdue.
3. How recent is it? A problem last month is assessed differently from one followed by 2 clean years.
4. Does the rest of the application work? Income, deposit, debts and the property still need to pass.

An entry coming off your credit report does not tell you when a lender will accept an application. Bankruptcy and debt-agreement records also have separate rules for the public insolvency register. The credit-reporting guide explains what to look for.

A lender needs to understand why the problem happened and whether you can afford the loan now. Job loss, illness, divorce or a failed business each need a different explanation.

A small phone default from an old address is a different problem from a mortgage that's overdue today. The amount matters, but so does what you've done since. Repayments made on time and a debt that's been cleared give the lender something concrete to work with.

If your last application was declined without a useful explanation, start with the home loan declined guide. It explains how I separate a credit-file problem from borrowing power, valuation, deposit and lender-policy problems. For further background, see our bad-credit history guide. If the problem arose after an initial approval, use loan declined after pre-approval.

Your own bank's answer isn't the only answer. An old, paid default may still fit a mainstream bank. A more recent or complicated problem may need a specialist lender.

The five lenders below have different products and credit rules. They are examples to check, not a ranking or a promise that one will approve you. Start with the ones that accept your circumstances, then compare the deposit, repayments and fees.

Compare written quotes for the same loan amount, repayment type and term. Include upfront fees, ongoing fees and the cost of moving again later. The advertised starting rate may not be the rate available to you.

If you are refinancing, also compare the new loan with keeping your existing loan over its remaining term. Ask how much debt you would still owe at the end of the comparison. Restarting a long term can lower the repayment while increasing the total interest.

Paying a default can give you more lender options, even though it usually stays on your report. The listing changes to paid, giving the lender a different picture of the debt.

If the entry is wrong, below the reporting threshold or listed without the required notices, challenge it first.

Read the full paid versus unpaid defaults guide.

A $450 phone default and several overdue accounts need different explanations. I check who listed the debt, when it happened and whether other problems came from the same event. A paid default followed by repayments made on time is easier to explain than a new default while other bills are still falling behind.

Keep the explanation short: what happened, when it happened, how it ended and the documents that back it up. Our home loan explanation letter guide shows the format I use.

A repayment pause can leave a hardship flag on your credit report. It can sit beside otherwise up-to-date repayments, so it is easy to miss. A lender may still stop an application when it sees that recent hardship information.

A hardship arrangement is different from a default or bankruptcy. Make sure the lender is looking at what actually happened.

Get the dates the arrangement started and ended, the account details and statements showing the repayments since. That helps explain a temporary problem and show whether the payments are manageable now.

If you are behind right now, the immediate priority is not a new application. Speak with the existing lender's hardship team or a free financial counsellor. The mortgage default guide explains what to do while you are behind. If the arrangement has ended, use the hardship flags guide.

Do not cancel a hardship arrangement simply because you are worried about the credit report. If the arrangement is keeping the mortgage affordable, deal with that first. A new lender still has to be satisfied that the proposed repayments work, and changing lenders is not always possible while the account is behind.

With bankruptcy or a Part 9 agreement, the first thing I check is whether it has legally ended. A credit score alone will not tell me that.

You do not have to assume every lender is off limits until the entry disappears. The answer depends on when the bankruptcy or agreement ended, your repayments since, current debts and deposit or equity.

Get the discharge or completion paperwork first. An agreement can be legally finished and still show on your report. Match that status to the lender's current rules rather than relying on a single waiting period for everyone.

You can have plenty of equity and an up-to-date ATO payment plan and still hit a lender's tax-debt rules. The balance, monthly payment, business income and purpose of the new loan all matter.

Compare keeping the ATO plan, paying the debt separately and clearing it at settlement. Moving a short-term debt into a 30-year mortgage might cut the monthly payment while costing you much more interest overall.

The ATO tax debt guide walks through that choice. If the aim is to move an existing mortgage, also read refinancing with bad credit.

If the ATO debt sits beside credit cards, personal loans or overdue bills, the problem may be wider than the tax account. The debt consolidation guide shows how to compare the monthly reduction with the total interest and the new loan term.

A mark on your report doesn't automatically mean a more expensive loan. Check the mainstream options first, then compare a specialist loan with waiting.

Waiting can also mean losing a purchase or leaving expensive debt in place. Compare those costs too. If repayments or essentials are unaffordable today, contact the lender’s hardship team or a free financial counsellor before taking on new debt.

A bigger deposit may give you more lender options, but you still need enough income to make the repayments. And I cannot simply add someone else's income unless they can join the loan as a borrower.

The same home can need a very different deposit depending on how much the lender will lend. That percentage is called the loan-to-value ratio, or LVR. It compares your loan with the lender's valuation of the property.

Your credit history, the property and whether you are buying or refinancing can change that limit. A lender might accept your application but require a bigger deposit. The example below shows what that means in dollars.

A family guarantee may help a deposit shortfall where the lender accepts the whole application. It does not remove credit or affordability requirements.

A specialist lender may consider credit problems that your bank won't accept. That flexibility usually costs more. Before taking the loan, work out what it solves today and what needs to change before you can look for a cheaper option.

Set the review point before the first loan settles. Base it on your credit history and the lender rules, rather than assuming everyone can refinance after the same number of months.

Include the cost of moving again when comparing loans. A future refinance is not certain, so the specialist loan needs to be affordable even if you keep it longer than planned.

Ask the credit provider or credit reporting body to correct an error before applying again. Send the documents that show what is wrong and keep a copy. The OAIC's correction guide explains the complaint process if the request is not resolved.

Check more than one reporting body. A listing or hardship indicator can appear differently across reports, and the lender may not use the same report you checked first. Once a correction is confirmed, obtain a fresh copy before the next application.

You can ask the credit provider or reporting body to fix an error for free. Paying a credit-repair company does not give it the power to remove accurate negative information. Keep the request and evidence, and use the complaint process if the issue is unresolved.

If a relationship breakdown caused the problem, the separation and credit-file guide explains joint debts and closure evidence. Business owners may also need the self-employed or alternative income-document guide.

Before your next application, gather:

• your Equifax and Experian credit reports, including the listings behind the score
• proof of payment, closure or completion for the relevant event
• the last 6 to 12 months of statements for the affected accounts
• a plain timeline of what happened and what changed
• current income documents and living expenses
• the deposit or current property value and mortgage balance
• the result or wording from any previous decline

Do not send medical details or sensitive background unless it is genuinely required and you understand why it is being requested. Explain what happened and include the documents needed to support it.

Match each problem with a document that explains it. After time out of work, show when your income resumed. After a separation, show which joint debts were closed or refinanced. After a business closure, show your current income and debts. Give the assessor the evidence they need without burying it in paperwork.

Client examples are based on real situations. Names and identifying details have been changed. The deposit example uses assumed lending limits to explain the calculation; it is not a loan offer.