Hints And Tips - Maintaining your Credit File
There are times when a course of action can have both a beneficial and an adverse outcome. Knowing the consequence of taking or not taking a particular course of action, will permit you to determine which the right choice is for you.
Listed below are some of those situations which may have an impact upon your credit file and your subsequent ability to gain a home loan. It may alleviate the need for a bad credit home loan or enhance your ability to refinance back to a mainstream lender.
Divorce and Separation
Around half of Australian marriages end in divorce and many people end up with impaired credit as a result. It is not uncommon for people going through divorce or separation to end up with mortgage arrears as a result of missing repayments. Repayments are missed because there may be a dispute over who should make the repayment. More commonly however it is because a lawyer has recommended that their client cease making repayments because to do so will reduce the outstanding loan balance and thereby reduce the equity at settlement and the corresponding settlement payout.
The adverse aspect of this course of action is that it could lead to credit impairment caused by the mortgage arrears. If it does not reach credit impairment, it still could make it very difficult to refinance the home loan in order to facilitate property settlement.
A lender does not simply convert a joint loan into a single person's name. The party paying out the other party must apply for the loan and their loan application has to be assessed. In order to secure the mortgage they will need to show up to six months of perfect repayment history. That is, repayments made in full and on time. The lender is unlikely to accept an explanation that it was the other party's responsibility to make the repayments, as an acceptable explanation as to why the repayments are in arrears. All parties have equal responsibility to a loan.
If you are going through a divorce or separation be sure to:
- Inform the lender of the situation
- Ensure you are receiving regular copies of the statements so that you can be sure repayments are being made on time and in full
- Cancel any redraw (advance payments) funds available via the mortgage loan
Rebuilding a Positive Credit History
Non-conforming loans provide short term solutions presenting the opportunity to re-establish a non-blemished credit file. Use this time to demonstrate good credit practices by:
- Ensuring that you pay all credit facilities (credit cards, mortgages etc) in full and on time
- Ensuring that your consumer debt level is commensurate with your income. A rule of thumb is no greater than 10% of your income (with the exception of your mortgage)
Evidence of your good conduct can be used to demonstrate your character when you refinance to a mainstream lender.
Disclosing Your Bankruptcy History After You Have Been Discharged
Your bankruptcy record will be removed from your credit file seven years after it has been recorded provided that you have not violated your bankruptcy code of practice. As part of a loan application it is typical for a lender to ask you to disclose if you have ever been bankrupt. Not to disclose will be seen negatively.
While the bankruptcy is removed from your CRAA, a permanent record is retained by the National Personal Insolvency Index (NPII). Lenders are able to access these records and may elect to do a check as part of the credit assessment process. Refinancing out of your bad credit home loan may trigger the assessor to conduct this search.