Face it: If you were bankrupt before, or had a debt written off, your loan application is now entertainment (i.e. trashcan basketball in the bank office). Bad credit is a major pain; whatever your current status, the fact remains that you were once a financial risk. The bank remembers. In their eyes, you’ll always look like an unemployed, alcoholic hobo. Well, for three to seven years at least. But at MoneySmart, we know that people, like finances, change. And we’ve worked out some ways you can still get a home loan:
1. Approach Non-Banking Financial Institutes
Even if you pay your debts, the bank may not want to give you a home loan. Look at it from their angle:
The issue isn’t that you’ve paid up. The issue is how hard it was to get the money. If it was like pulling teeth with chopsticks, you can bet they’re not interested in round two. So when you ask “Do you offer home loans?” their answer will probably be “Yes, and don’t let the door hit your ass on the way out.”
Fortunately, institutes like Hong Leong Finance are more forgiving. Most of them only require that you pay off existing debts. Beyond that, your track record of repayments, however spotty, is irrelevant. The downside to this is that you’re being charged for the risk: such institutes will implement a higher interest rate. If the current SIBOR rate is 1.5%, for example, expect maybe 1.8% from them.
2. Appeal to the Bank
When you get a credit report from the Credit Bureau of Singapore (CBS), it’s a quick and dirty summary. You get a single grade, like A or B, which supposedly describes everything worth knowing. As with the PSLE or O-Levels, it’s about as accurate as a blind machine-gunner on a pogo stick.
Unfortunately, that’s what the banker’s looking at.
Since the summary doesn’t include fine detail, it’s up to you to elaborate. For example, explain you’re in a legal dispute about the balance on your credit card, and hence haven’t paid it. Alternatively, you might stress that you are financially responsible; it’s an unforeseeable emergency (medical or disaster related) that’s dented your credit.
Show the following to the banks:
- Evidence of your finances before your situation, such as bank statements that show regular payments
- Letters of endorsement, from business associates or clients
- Legal statements, such as a small claims tribunal letter
- A more comprehensive credit report, which is a service some accountancy firms offer
Remember that, on a personal basis, mortgage bankers want your loan to be approved. Their commission depends on it. Ask them to work with you, or they can eat yong tau foo for the rest of the month.
3. Secure the Loan with a Cash Deposit
Some banks let you secure the loan with a cash deposit. In addition to this deposit, there’ll be a lien on the house. UOB used to have a package like this, but it’s off the market now (what’s going on, UOB?)
Still, keep an eye out for this. You may even raise the possibility with the bank, if you have a lot of cash on hand. The amount of the deposit will vary based on the severity of your bad credit; the more money you owed, the higher the deposit and consequent interest will be. Note that missing or stalling even a single repayment can result in the loss of your deposit and the house.
Where this option is available, it’s the fastest and easiest way to secure a loan on bad credit. But it’s also the most expensive, so use it as a last resort.
4. Close Your Existing Credit Lines
If you have any unpaid credit cards, work on closing them before getting a home loan.
Whoa, did we say something contradictory there?
Yes, I know we’ve said using credit cards builds a credit score. But at this point, you can forget about that; you already have bad credit. It’s like trying to exercise a broken leg. Focus on closing credit lines for now, to show that your debt situation is under control. You can start applying for credit cards and rebuilding your score later, after your home loan is settled.
If you have a range of credit cards, start by paying off the cards that are closest to their limits. From there, move on to the cards with the highest interest.
5. Co-Signing a Loan
This method sometimes works, depending on the severity of your bad credit. It’s important to find a co-signatory whose credit score significantly outshines yours. Otherwise, your bad score will just pull down the other person’s. For example:
A husband and wife are co-signatories on a home loan. The wife has an average credit score, whereas the husband’s score is the finance industry’s joke of the year. In this situation, it would be better for the wife to get the loan herself, rather than co-sign with her deadbeat husband.
But in other cases, such as when the co-signatory is a friend trying to help, it could improve the odds. Again, that’s assuming the co-signatory has a better-than-average credit score. There’s no harm in trying; just don’t get your hopes up.
6. Contact MoneySmart
Even if you have bad credit, drop by MoneySmart. Our mortgage specialists are committed to finding you the best possible options, given your situation. Don’t let bad credit drive you to desperate measures; depending on your situation, you may not even have to accept high interest.
Talk to us first. We’re not the bank, and our service is free.
thetorpedodog, Todd Baker, Chris Radclif, SqueakyMarmot, USACEpublicaffairs
Are you struggling with bad credit? Comment and let us know!