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Credit Problems? No Problems!
Most lenders that we typically approach for our housing loans, personal loans, bank accounts and credit cards are referred to as prime lenders. These include building societies, credit unions and mortgage managers. Prime Lending refers to normal lending practices, which have been adopted by these lenders, their mortgage insurers and legislation. Prime lenders have fairly strict and specific criteria for their borrowers, and many people who don't quite fit into the 'ideal borrower' category (for that specific lender) may discover their loan application has been declined.
We've all heard comments made b banks such as "our mortgage insurers will not approve your loan," "sorry, your business financials don't support the loan you require" or "you can't prove that your deposit was saved over a period greater than 6 months." Borrowers with defaults, judgments or previous bankruptcies may also experience frustrating knock backs when they try to obtain a loan from a prime lender.
These restrictions on borrowers in the prime lending market have opened a whole new market in this country called sub-prime lending. Sub-prime lending is relatively new to Australia and has opened many new possibilities for borrowers who may not be able to obtain traditional bank finance, but are still good credit risks.
Sub-prime lending is broken up into several categories, which we'll discuss in more detail. Some of the different categories include:
"No Doc" or "Self Certification" Products
These are normally for self-employed applicants who either have not prepared their financials, or have lodged their financials but have minimized their profit through their legally entitled cash and non-cash deductions (expenses).
The borrower is required to sign a statement confirming the loan repayments can be met from the businesses cash flow. Lenders with this style of facility usually charge a higher interest rate.
"No Deposit" Products
These loans can allow some purchasers to borrow up to 105% of the purchase price on a residential property and 110% of the value on a refinance. Banks and the like will normally insist on a minimum 5% deposit for an owner occupied purchaser and 10% for an investment purchaser.
"Credit Impaired" Borrowers
Should any borrower have a default, judgment or bankruptcy noted on their CRAA (Credit Reference Association of Australia), they can expect difficulties in obtaining the 'prime' loans that are available to borrowers with no CRAA problems. For example, a borrower with no credit issues may obtain a housing loan up to 95% of the purchase price with a prime lender, whereas a borrower who was discharged from bankruptcy only one month ago may not be offered a loan at all. Most prime lenders' policies state that ex-bankrupts must be discharged for a minimum of 1-2 years. However, these borrowers may be able to obtain loans immediately after being discharged through sub-prime lenders.
Most lenders either specialize in the prime lending market OR they specialize in the sub-prime lending market.
Home Loan Connexion has several sub-prime specialists on its Panel, which again gives our clients choices that they would not have if they approached a Lender directly.
So what's the bottom line? If your loan has been declined, don't despair…maybe you're just not in the 'ideal borrower' category for that particular lender. For another lender you might be the 'perfect borrower'!