How do Credit Files affect Home Loan Applications?

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Transcript of: How do Credit Files Affect Homeloan Applications?

In today’s podcast, we’re going to discuss how your credit score affects your ability to buy a house. We’re going to have a chat about what is the credit file, and then what is the credit score because the two different things and lenders look at both of them, we’re going to have a look at a little hidden gem called credit repair, which most people don’t know about. So if you’re listening, and you’ve got some credit default issues, this is definitely one you want to stick around for. Let’s get into it.

Hello, and welcome to the First Homeowner Concierge Podcast. Where our sole target is to get you into your first home. Now onto today’s topic.

Before we start, if you have any concerns about your credit file or your credit score, please get in touch with the team at Will Bell Mortgage Broker today to see if there’s a solution for you. That’s what we do. Working these solutions are not easy. So sometimes the easiest thing you can do is pick up the phone and talk to an expert. Now, what is a credit file? And why is it important? Well, the credit file is basically a file that is a record of your past financial behaviours. So it’ll record certain information like if you’ve missed any payments on any of your debts in the last two years in a record information like defaults, which is basically when a bill is overdue for at least two months and the business that owes you money can list a default on your credit file, which can stop you from getting credit in the future. The credit file also shows the amount of inquiries, which is how many times you’ve gone for credit over the past five years. And all of that stuff goes together and gives you a credit score. 

Missed Payments and Debts

Missed payments on debts in the last two years is obviously important for a lender to figure out if you’re good for the loan, if they can see any missed payments, a lot of lenders are just going to say no, we don’t want to do the loan with you, they’re going to decline the loan. Some lenders will want certain commentary around why it happened. Maybe you change bank accounts and the direct debit didn’t go through or you changed addresses, someone is going to be okay. And then other lenders are going to want more information around it.

So for example, your credit score can show how late the missed payments are. So something that’s one day late may be fine with the lender but something that’s kind of, say, for example, 50 days late is going to be no go. What you need to understand is from the bank’s point of view, or from the lenders point of view, they’re going to look at it and say, well, your ability to pay your bills is either acceptable to us or not acceptable, depending on what’s on the credit file. Defaults. As I said, if you don’t pay your bills, you are going to get a default. That’s a very clear cut way for a lender to assess the risk of you not paying the home loan. The amount of inquiries can often get people because I’ll see a lot of inquiries where people are just applying for stuff kind of willy nilly almost there’s a lot of applications for credit. And people don’t understand that these actually get recorded on your credit file. And if you’re doing a lot of them it punishes your credit score, and lenders can see who you’ve done the inquiries for which also counts. So, for example, if you’ve done an inquiry with a payday lender, for example. 

So a payday lender is a lender you can go to for a small loan, maybe $300 to $500. And the loans repayable once you pay comes in, they charge exorbitant fees. And that is an example of someone that probably isn’t managing their money very well. I’m talking from the bank’s point of view here. And the people who manage the credit scoring system understand this as well. And your credit score can get punished further, what is the actual credit score? Well, the actual credit score is basically an easy way for a lender to figure out if you’re good for the loan or not, it’s compiled of all the previous things I’ve talked about in the last two or three minutes. Again, depending on your position, and depending on what your credit score is going to beat up on how likely you are to be able to get the finance I think it would help if I kind of went over what would be considered high and low as a credit score in the bank eyes because you can then just go check out what your actual credit score is. Anything kind of under six or 700 depending on the lender is considered to be risky. It doesn’t mean you get declined for the loan. In actual fact, there are solutions in almost every stage depending on what your credit score is to get approved for a home loan. Anything under 700 is probably considered a little bit low. Anything over 700 is kind of good for the banks.

The Big 3 Questions

Next up, we’re going to dig a little bit deeper into this topic. And there’s going to be three things in this section. Number one, how to get a good credit score. Two, if you have a bad score, and you want to increase it, how do you do it? Number three, what happens if you have a default? 

Getting a good credit score is pretty easy. If you are a normal individual, all you need to do to get a good credit score is do the right things. So pay your bills on time. If you don’t currently have a good credit score, then you’ve got to avoid debt where possible, you’ve got to avoid applying for debt because as I said, they can see how many inquiries you’re making to get loans. You need to understand that things like afterpay zippay, buy now pay later schemes, it’s all debt, technically, and that’s how the banks look at it. Because for someone that has a decent credit score, now, it would actually be hard to understand this. Because you just do the right things. And to you that is normal. But for someone with maybe the not best financial skills and financial habits, that actually don’t understand how this is hurting them in the long run.

Number two, if you’ve got a not so good score, and you want to increase it, so you want to get that score up to 700. For example, obviously, you need to make sure all your bills are getting paid on time. So if you’re having problems with that things like setting up direct debits can help. If you just have situations where you don’t have enough money, I can’t help that, you’ve got to do something about that. Either spend less or earn more. That’s probably a different topic. Other than this podcast, you got to stop applying for debt you’ve got to stop doing afterpay’s and  zip pays, go MasterCards, your payday lenders, stop applying for credit cards and personal loans. Because those inquiries sit on your file for five years, what you really need to know is that the bank’s probably going to look at really your last two years worth of inquiries. So if you just stop, eventually your credit score will improve in terms of applying for other debts. That’s the main thing you’ve got to understand is it takes time, a lot of people with bad credit files, typically younger people. And typically younger people think things can happen straightaway. Unfortunately, the damage has been done with credit files. And generally the score does take a bit of time to come back. Normally what I would say is you’re talking six to eighteen months for your actual credit score to come back. So you’re waiting around for a little bit of time.

 

The other thing I wanted to mention in this video is that what I do as a mortgage broker is I’m the middleman between the lender and the client, the person wanting to borrow the money, I can see things on both sides of the scale. So obviously, when someone comes to me with a low credit score, and they want to borrow some money, I’ve got to sit in the lender’s shoes and watch how the lender will look at it. 

So as I say, that’s why you need to get rid of these afterpay’s and zippay’s because lenders look at them. Even if your credit score was good, and they saw them on your credit file, it’s still not a good look. Because it tells the lender, you’re actually spending more than what you’re earning. Because the way they look at things is if you didn’t need the debt, why did you take it out. And I know that’s not the case. In reality, I know a lot of people take afterpays and zippays out and they could just afford to pay for the product outright. But unfortunately, when you’re sitting in the lenders, shoes, they’re very risk averse, because obviously if you can’t pay the money, they’ve lost all of it.

Credit Default

Credit Default. So let me just roll over what a credit default is again, you’ll get a default, if you don’t pay something for 60 days, just to clarify 60 days past the due date. So if you have a bill that’s over 60 days past the due date, the company or provider that you owe the money to can lay a default on your credit file, obviously defaults are bad, and as soon as lenders look at them, that is a big red flag and it will punish your credit score. Now this doesn’t mean that you can’t get a loan because you’ve got a default. So most people automatically think that and I think a lot of the reasons why that is so is because if you go to a mainstream lender, then that’s definitely the case. Unfortunately, the mainstream lenders aren’t aware of the other products out on the market, like a good mortgage broker would be and therefore the average person doesn’t get access to those solutions. The easiest way for me to explain kind of the debt solutions for credit default is explaining the different types of lenders so you’ve got conforming lenders, which is a deposit taking institution. So that’s all your normal banks. So you’re big 4, your second tier banks, anyone that’s a bank.

Nonconforming is something that isn’t a bank, they don’t have deposit products or anything like that. They have different rules that apply to them. Therefore, they’ve got different risk appetites, you can forming type lenders are generally the one that’s going to be a lot stricter with defaults. Having said that, I do have mainstream lenders that will accept some defaults, depending on what they are. And that is mainly telecommunications defaults and utilities companies default. So things like your power bills, so long as they’re not too high. So I’m talking under $500, maybe $1000 if you’re pushing it. If that’s the case, then potentially we can get a mainstream lender to look at the application and assess the application as a normal home loan. What does this mean? You just get access to normal interest rates. A non conforming lender, on the other hand, is a lender that will approve you despite any defaults. The difference with that is that you’re going to need to bring a much larger deposit, because the non conforming lenders are taking on a lot more risk. And they will charge you higher fees and higher interest rates for the privilege. When it comes to non conforming lenders, the solutions do vary a lot. And it does add a whole lot of complexity to you know what your options are and how the loan get assessed. So you’re best off just talking to a mortgage broker there. 

Credit Repair

The other thing which I touched on at the start, which is a little secret for people with credit defaults, is something called credit repair. Credit Repair basically exists because when the provider which you have 60 days late to puts the default on, there’s supposed to follow a particular process in putting a default on your credit file. Because at the end of the day, having a default on your credit file has some major ramifications for you to access finance. So there are rules and regulations in place for how these defaults can be put on you. Unfortunately, or fortunately, depending on where you see the defaults aren’t added to credit files in the correct process. And what credit repair does is basically going investigate this for you and figure out if something has gone wrong in the process. And therefore the provider who’s put the default on has done it incorrectly, then legally they have to remove the default. So I’ve used these before, and they do have a high strike rate, usually you can call a credit repair company, you can simply just Google credit repair Australia or something like that. And you can have a chat to them. And they’ll give you have a fairly good idea of if they think they can help you out or not. 

Cost wise, I haven’t used one lately for any of my clients. But I’ll be thinking $600 plus depending on what your situation is. So $600 to get it fixed, in many situations, so for example, if you had a small deposit, and you just couldn’t get access to a home loan, because a non-conforming home loan requires a larger deposit, then credit repair is quite often the way, sometimes I recommend credit repair, even if the client can get access to a non-conforming loan, because obviously they’re paying higher fees and rates on the non-conforming loan. It really just depends on the client situation. Obviously, if they’ve got time, that’s cool. If they need to do things yesterday, which is what a lot of people need, then we just need to go ahead with whatever the solutions are at the time.

Bankruptcy

That’s pretty much it in terms of credit repairs, the only thing I wanted to touch on was bankruptcies. So every now and then I’ll have someone contact me that is bankrupt. If you are bankrupt. There’s nothing you can do in terms of finance, if you have been discharged as bankrupt is a different thing. being discharged means you’ve gone through the whole bankruptcy process, which can often take quite a long period of time. Because there are a lot of things that needs to be sorted out. But once you’re discharged bankrupt, which is shown on your credit file, then there are options for you. You need to come with a big deposit. There’s no kind of five or 10% deposits with discharged bankruptcy, you’re looking at minimum of 20% that there are options out there.

Re-Cap

That’s pretty much it. I’ve covered everything that I can think of to do with credit scores and home loans, just to go over everything. There’s actually options for almost every situation When it comes to credit scores and your credit files, it doesn’t really matter what situation you’re in your regarding your credit file. There are generally options out there. Now, whether you qualify for them or not is a different story. While your best to do is get in touch with us, shoot us a message and we’ll be happy to have a chat to see if this is something you can do. If it’s not something that you can do, then we put a plan together for how we get it done in the future. Once again, thanks for listening. cheers.

Thanks for listening to today’s episode of the First Homeowner Concierge Podcast! If you’ve got any questions or you would like to get into your own home, or you just want to stalk me online, you can search Will Bell Mortgage Broker on either Google or Facebook.