If you’ve been late with an electricity bill, or missed a payment on your credit card, you may receive a Payment Default Notice which specifies the number of payments you failed to pay. Any defaults that result in a late payment will be lodged on your credit by the provider, which may create a roadblock for home loan approvals and stop you from purchasing your dream home. Luckily, there are ways you could still qualify for a home loan and negotiate your way around payment defaults.
What is a credit file default?
A default is a record on your credit file that states you have an overdue account (for example, a loan, credit card bill, utilities or phone bills). It’s classed as overdue if the payment is 60 days late or if the lender has been unable to get in touch with you to get payment. Defaults are lodged on your credit with Equifax, which could then be accessed by lenders when you apply for a loan through them.
Defaults remain on your credit file for five to seven years if it was lodged as being ‘non-contactable’. Paying the default after the fact doesn’t remove it from your credit file, however, it does change the status on your file to ‘paid’ which is seen more favourably by lenders.
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Could I get a home loan with several payment defaults?
Your ability to borrow depends often on the type of default you have and how old the default is. Typical lending constraints include:
- Under $500 in loan defaults – Each lending criteria is different and restrictions to the amount you could borrow will apply. Depending on the lender, this could be up to 95% of the property value.
- Under $1000 in loan defaults – The maximum amount you could borrow is up to 90% of a property’s value. Of course, this depends on the lender and their criteria.
- Over $1000 in loan defaults – Each lending criteria is different and restrictions to the amount you could borrow will apply. Usually the larger the default, the harder it is to secure a loan. However, in saying this, there are specialist, private and non-conforming lenders that may assume the risk. But, their interest rates will be higher.
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What happens if I have a larger default?
The larger your default, the bigger the impact on your home loan eligibility. They also decrease the amount you could borrow. Some of the most common sizeable defaults considered include:
- Recent defaults less than $1000 – If your payment defaults are under $1000 in the last six months, then a lender could restrict your borrowing. Typically, lenders will allow you to borrow up to 80% of your property value.
- Defaults over $1000 – When your payment defaults are usually more than $1000, you’ll need a specialist lender. These lenders will need evidence to back the reasons for default. They will also restrict your borrowing to 80% of a property’s value and you may incur a higher interest rate until you could prove you’re able to keep up with repayments.
- Payment defaults over $5000 – Partially paid debts over $5,000 potentially represents a bigger problem. Most lenders will not assume this risk, although private, specialist and non-conforming lenders may look at your application. If you pay out your debts before applying for the loan, you’ll increase your chances of approval.
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How to apply for a home loan if you have default payments
To assist in increasing your chances of getting approved for a home loan, you could consider some of these options:
- Provide a default explanation letter explaining why you were late on your payments and what financial position you’re in now
- Provide evidence to back up your explanation of the cause of the defaults (statements, letters, emails, etc.)
- Pay any unpaid defaults and have it marked as ‘paid’ on your file before applying for the home loan
- Apply with a lender that accepts borrowers with defaults (not mandatory, but it is easier to be approved)
Could a broker help me improve my credit score?
A mortgage broker could make suggestions that will help you improve your credit rating. These include:
- Paying off defaults – If you have any outstanding defaults, a broker could suggest ways to pay them off all at once
- Reducing credit card debt – Maxed out credit cards could indicate a problem to a lender, so they will work with you to reduce any outstanding debt. So, rather than applying for a loan with considerable debt already, seek to reduce this.
- Decreasing credit card limits – As you pay off your credit card debt, look to reduce its limit. The less your credit card limit is, the greater your borrowing power will be. A regular payment history will also show a lender that you manage your money well.
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Words by Joanne Ly
Do you want to learn more about how your credit score could affect your home loan? Our experienced mortgage brokers have access to 100s of mortgage products at eChoice, to help you find the right home loan for your situation.
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