How does a person who has just been discharged from bankruptcy get a 90% home loan when every other finance “expert” says it’s impossible?
If you thought that you’d never get a home loan again because you went bankrupt then this is going to be the best news you’ve heard in ages
Here’s how it all works:
In Australia there are a group of lender led by the big banks which are generally known as “mainstream lenders”. They have very tight restrictions on lending to ex-bankrupts and while some of them will tell you that they might consider you for a loan, they generally won’t until you have been discharged from bankruptcy for 2 years.
In 2011 the way bankruptcies are listed on your credit report changed. The old way was simple, the bankruptcy stayed on your credit report for 7 years from the date you went into it. The current bankruptcy listing will usually see the bankruptcy fall off your credit report 2 years after being discharged from bankruptcy.
While the bankruptcy is still on your credit report, mainstream lenders generally won’t give you a home loan, they would only consider you if the loan is below 80% of the property value. Above 80% mainstream lenders insure their loans with Lenders Mortgage Insurance (LMI) and they WON’T insure loans for people who have a bankruptcy event on their credit report.
Fortunately, there is another group of lenders who accept borrowers with credit impairment including ex-bankrupts, Part 9 & Part 10!
To understand what each one is, click here: Report on Part 9, 10 and Bankruptcy For the sake of the argument, we’re going to call all of these things ex-bankrupt because they all fall under the bankruptcy act and ALL LENDERS TREAT THEM THE SAME!!
Unfortunately most home loan brokers don’t understand how to use these lenders and will tell you that you can’t get a loan. Why is this? Well, it’s because most home loan brokers are ex bankers and rarely have to deal with it. They think it’s going to be too hard so they don’t bother.
We’ve specialised in credit impaired lending since 2002 so you can be confident that we’ve just about seen it all before and know all the lenders rules. The lenders who do these sorts of loans obtain their wholesale funding from the MAJOR BANKS! They are legitimate, safe and reputable businesses. They all abide by the Credit Act which governs lending in Australia and are administered by the ASIC.
This 2nd group of lenders are what we call “risk to rate” lenders. That means that the greater the credit impairment & higher the risk to the lender, the higher the interest rate.
But while you might be able to realize the dream of owning your own home when you didn’t think you could, the interest rate you pay will be higher than the mainstream lenders.
How much higher depends on your credit impairment and what Loan to Value ratio (LVR) you require. LVR is a critical question in the process because the more you borrow against the value of the property the higher the risk for the lender. So if you have a big deposit because of an inheritance or something and you only need to borrow 50% of the value of the property then you are a much lower risk than someone who needs to borrow 90%.
Case Study 1
Let’s have a look at Ian who went into bankruptcy after having an accident which caused him to stop work due to injury. After the 3 years of bankruptcy, he received a payout from the insurance company and used it as a deposit for a house. He only needed to borrow 70% LVR so the interest rate was reasonable low
Out of the 6 or 7 lenders in the “rate to risk” group of lenders, only a couple of them lend to ex-bankrupts with any enthusiasm, and out of this couple of lenders there is only ONE lender who will lend to 90% LVR provided the property is in a location acceptable to them.
They categorize locations but how big the population is and whether the property market in the area is volatile or not (like mining towns which are very volatile). Category 1 & 2 locations are major cities and towns and they will lend up to 90% here. Category 3 are medium towns (the cut off is roughly 20,000 people) where they will only lend up to 75% LVR and category 4 locations which are very small towns where they would only consider a 70% home loan
They also have a couple of other quirks that the mainstream lenders don’t have. The most notable is that they WON’T lend on vacant land, rural zoned properties or do construction loans. It’s not that they don’t want to; it’s just that their funding lines won’t allow them to.
This can cause a few problems if you want to build a nice new house and land package, especially if you’re able to save stamp duty costs and qualify for a higher amount of First Home Owners Grant (FHOG) funds.
There’s not much you can do about the stamp duty issues however you may still qualify for the FHOG if you can find a developer who can carry the cost of the construction and allow you to buy the house ON COMPLETION.
Case Study 2
Let’s take a look at Sam & Paula who wanted to buy a house and land package in Victoria. They found an area they wanted to buy in and then asked the developers to settle on completion. After talking to a couple of them, they found one that was happy to do it provided they paid a 10% deposit when the contract was signed. Sam and Paula were gifted 10% deposit from a family member and the construction started. The contract was still subject to finance to protect them, they asked us to provide a pre-approval for the property before they went to contract which we easily did.
The dream of Home Ownership
The dream of home ownership is as real for ex-bankrupts as it is for the rest of the community. There are a couple of rules that are slightly different and the interest rate is going to be higher than mainstream but if you have 10% deposit plus costs then you’re well on the way to being in your own home!
To determine whether you’re going to qualify, we’ll need to check the postcode that you’re buying in, make sure you have enough funds to cover the deposit plus costs and that you have enough income to service the loan repayments. Even better is that you can apply for a pre-approval BEFORE you start looking so that you know you’re not wasting your time!
Ready to get started? Call 1300 139 883 to speak to one of our trained loan experts or send an email to firstname.lastname@example.org and we’ll get back to you.