It doesn’t matter if an individual’s defaults are paid or unpaid. They will stay on their credit file for five years after the date the lender processed the default. This may make it more challenging for borrowers with even small, paid defaults to secure a home loan, but it does not make it impossible. Lenders may be more accepting of small defaults on a credit file than larger ones. What is considered a small default and how do banks assess them?
Small default basics
Banks assess loan applications with defaults on a case-by-case basis. Different criteria are used to determine a loan’s level of risk. For example, lenders will look at how old the defaults are and what the borrower defaulted on, whether or not they eventually paid them, the number of loans they have, and the total value of all the defaults on their credit file. Your client can increase their chances of being approved for a home loan if they have fewer defaults and if their defaults are for smaller amounts.
Banks and traditional lenders are more likely to approve the following loan amounts:
- More than 80% with defaults totaling less than $500
- Less than 80% with defaults totaling less than $1,000
Other criteria most banks require are that a credit file contains no more than two default, all default were paid six months before an individual filed their application, and they have accrued at least 5% in savings over the last three months.
Can Specialist Lenders help?
Specialist lenders can be more flexible with their loan criteria. They can accept loan applications even if there are more default on the borrower’s credit file. They also work with you, analysing your client’s financial situation and life situation to understand why their credit is poor. If they can’t apply for a traditional home loan, they may be able to apply for a low doc loan with a specialist lender.
Mortgage Street and our team of brokers are specialty lenders. We know the ins and outs of bad credit home loans and can work with you to help you find a loan for your clients that fits their needs, even if they have default.