Getting a home loan with bad credit

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Financial institutions typically view an applicant with a bad credit history as too high risk for lending.

But despite our historical financial failings or miscalculations, some financiers including sub-prime lenders understand that a borrower's capacity to repay a loan isn't always determined by what may have happened in the past.

Prime lenders (e.g. banks, building societies and credit unions) provide loans for people who have reasonable to excellent credit histories because they represent a low risk of default.

Sub-prime lenders can cater for those who fall outside the prime category, including those with defaults, repossessions or  bankruptcies on record.

Financiers often classify sub-prime borrowers on a scale of 1 (best) to 4 (worst).

Sub prime borrowers with a rating of 3 or 4 are those that the lender expects to be a higher likelihood of default that rating 1 or 2.

There are lenders in the sub-prime market that will provide finance to those with a 3 or 4 rating.

You still need to disclose everything about your financial position and credit history when you apply to a sub-prime lender. This information is important to the lender in understanding the best way to structure your mortgage to minimise future difficulties.

If your employment is relatively secure, your wage is healthy and you can demonstrate that you are meeting current commitments on time, it's possible that you could qualify for lower interest compared with an applicant who is not making reasonable steps to rectify their situation.

A sub prime loan will generally be more expensive than a prime loan because the lender will need to earn a higher margin to cover the increased overall risk that they are taking.

Sub-prime lending is a competitive business, so don't be talked into the first offer you come across if it looks too expensive or too restrictive. There may be other lenders equally able to assist you without charging unreasonable interest rates or other fees.

In fact, most sub-prime borrowers (including those with a rating of 3 or 4) should be able to find enough alternatives to have the lenders compete for their business. 

Why should your past financial problems determine what happens now? Owning a home may still be well within your reach.