Bad Credit Mortgage Refinancing
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In this article I will explain how bad credit mortgage refinancing works.
If you have bad credit, mortgage refinancing will be a challenge for you. In the first place, most banks will turn you away and you will have to consider alternative lenders. Fortunately, there are many lenders who specialise in lending to people with bad credit histories; but first of all, what is a bad credit history.
This is important to understand, because it will determine what percentage interest the lender will charge for a loan, and in general terms, the worse the case the higher the interest rate. Most of these lenders will categorise applicants in the following way:
• How many arrears notices have been issued by the current lender in the past six months?
• Are there any outstanding Court Judgments outstanding, i.e. unpaid? If how many?
• Are the Council Rates paid up to date?
• Have there been any Credit arrangements made which are still current?*
• What is the loan to value ratio (LVR) i.e., the loan amount expressed as a percentage of the value of the property?
• What is the employment history of the applicant?
• What is the reason for the trouble in the first place?
(*Arrangements mean PartX debt arrangements entered by the borrower under the Bankruptcy Act to pay out creditors by way of an agreed schedule.)
What the lenders are doing through his process is painting a picture of the applicant. They treat each case on its merits, and will make an offer based on their assessment.
Typically, the better the explanation and the better the chance of there not being a recurrence of the problem, the lender will lend more at a cheaper rate.
Some examples make it easier to understand.
First, take a person with a steady job and a good credit history, who loses his job following a car accident which puts him in hospital for two months. His home loan falls into arrears and he can’t make up the difference. His current lender even after giving him some time to bring the loan up to date will not give him extra time.
Second, take a person who has fallen behind on his home loan payments, takes out a credit card and uses cash advances to pay the arrears. He then obtains a car loan, but soon falls behind. There too. Then the credit card falls into arrears.
In both cases it is likely that a non conforming lender will agree to assist with a loan to refinance each borrower. The first applicant will be more likely to attract a better deal however.
I once had a client who had been in arrears with her home loan, and had also defaulted on her car loan, her two credit cards, and a personal loan she had taken from a “pay day” lender. Her salary was quite high and there was no apparent reason for her arrears. A study of her bank account statement, however, showed many cash withdrawals from ATMs at casinos, usually on a daily basis. The non conforming lender declined her application because they judged that she had a gambling problem at the root of her loan repayment problems. It was therefore likely that giving her another loan would not solve her problem.
The real point to all this is that the earlier a person addresses the problem by contacting their lender, the easier it will be. Secondly, there are financial counselling services that can also offer assistance. If you try to take control early, you will do yourself a real favour. And remember, there is usually a way out of the problem that is easier than you think.
If you have a friend in trouble, or need to discuss your own position, please ring me for a confidential discussion as soon as you can on 1300 133 193.