If you are at a stage in your life of considering purchasing a home, but have been bankrupt in the past, it’s easy to become confused about bankruptcy rules and when you can apply for a home loan.
Different lenders will have different rules and requirements, so finding the right lender to suit your circumstances is key.
Your mortgage broker will have the solid reputation and contact base to be able to assist you, and their experience will ensure they have a good knowledge of suitable lenders for your particular state of affairs.
If you have filed for bankruptcy, finding the right home loan that suits your personal situation is important. Here we’ve outlined some points to help on your quest, and answer some questions in regard to bankruptcy and home loans.
Bankruptcy is a legal process releasing an individual from debt.
If you find yourself in a situation of having debt you’re unable to pay, you can choose to apply for bankruptcy and your financial affairs will be managed by a trustee of the Australian Financial Security Authority.
Alternatively, if creditors have unsuccessfully tried to recover debts you owe (minimum $5,000 total), you can be forced into bankruptcy.
In Australia, bankruptcy endures for three years from declaration.
The consequences of being bankrupt are evident both immediately and in the future, and may have a number of adverse effects, including:
- Difficulty obtaining credit
- Restricted employment possibilities
- Loss of assets and personal effects, including your property
- Listed on credit report for five to seven years
- Listed for life on public record (National Personal Insolvency Index).
Despite the obvious difficulties, bankruptcy doesn’t have to be the end of your home loan prospects.
Whether it’s a voluntary or forced action, filing for bankruptcy is difficult, and even more difficult when trying to re-establish your financial situation.
Applying for a Home Loan after Bankruptcy
Obviously your lender options will be limited, but IT IS still possible to successfully apply for a home loan following bankruptcy.
Rates and fees for a home loan are likely to be substantially higher, and it also may be a requirement to:
- Have a guarantor
- Use an asset as security
Some lenders are willing to provide a bad credit personal loan, and sometimes for substantial amounts, including home loans.
To be considered and approved for this type of loan, the following criteria may be taken into account:
Although such a product as unemployed loans can sometimes be an option, it is highly likely you will need to be employed and able to prove employment. Criteria is likely to be stricter for bankruptcy loans, and it is likely your employment will need to be ongoing and regular. Self-employment or part-time employment is unlikely to be accepted in these circumstances.
Your regular income will be taken into account, and depending on the specific lender, there may be minimum income requirements, and income may need to be purely from regular employment. In some circumstances, a combination of income from employment and Centrelink may be allowed. If this is the case, there are usually limitations, such as your repayments are not to exceed a specific percentage of your Centrelink payments, and only a certain percentage (often 50%) of your income can be from Centrelink payments.
You may be required by the lender to provide a guarantee in the form of an asset secured to the loan, to protect against defaulting on the loan.
Lenders will need assurance that you are able to meet your home loan repayments after taking your debts and liabilities into account.
Applying for your home loan with a guarantor (a person who acts as a guarantee on the loan) may improve the likelihood of successfully applying for a home loan.
If considering applying for a home loan following bankruptcy, additional points to take into account may include:
- Are repayments affordable for you, especially taking into account that your assets and income have been affected by your bankruptcy status?
- Are you prepared to re-enter a substantial financial commitment of this nature?
- Have you discussed your personal situation with a mortgage broker and/or financial advisor?
When to Apply for a Home Loan Following Bankruptcy
Although your bankruptcy record may be listed on your credit file for up to seven years, and on public record for life, this doesn’t mean it’s not still possible to apply for a home loan.
Your home loan aspirations may be put on hold due to bankruptcy, however, there are a selection of lenders in Australia who specialise in difficult circumstances and will consider lending shortly after bankruptcy.
Although higher rates and fees are evident, as well as stricter terms and conditions, and possibly a larger deposit, it means not having to wait too long to apply for a home loan following bankruptcy.
Bankruptcy home loan conditions vary amongst lenders, but as a general rule at least two years is recommended from your bankruptcy discharge to applying for a home loan to achieve a successful result.
Some lenders, however, will consider lending in a shorter than two-year timeframe after bankruptcy, and specialise in these types of loans and circumstances.
As a general rule, the more amount of time that has passed since being discharged from bankruptcy, the better. This assures lenders you are serious about your financial obligations, able to meet your repayments, and have attempted to rebuild your finances since bankruptcy.
Although there may be some variances, most lenders will require you to be discharged from your bankruptcy status before applying for a home loan. Lenders have varying rules and requirements, however most will not allow you to borrow if you are still listed as being bankrupt.
Your mortgage broker will have professional knowledge of lenders willing to consider home loan applications following bankruptcy, and it’s particularly important in such circumstances to only apply to one lender at a time. If initially rejected, it is also wise not to immediately apply to a different lender, as all applications appear on your credit file.
Applying for a home loan after being bankrupt means being particularly cautious, and only applying to lenders with a solid reputation who offer loans under these circumstances. Your chance of approval will be higher if you take these considerations into account.