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One of the harsh truths of life is that most things you do have an equal and opposite reaction. And perhaps nowhere is this more significant than in the field of personal finance. If you have made late repayments, your credit takes a hit. If you default on a loan, your credit takes a hit. If you go bankrupt or a bank decides to foreclose your mortgage, you are in deep financial trouble.
The main problem with such negative incidents that result in bad credit is that even if your financial situation improves and becomes stable, banks will be reluctant to lend you money. As far as the lenders are concerned, once bitten twice shy. Lending money to you was a risk once and it could be the same again, at least for a certain number of years.
But this should not stop you from making solid financial plans that would help you get ahead in life. If you want to buy a home and feel that you have reached a stage wherein you will be able to take a loan and repay it on time, there are several things to consider.
Settle up Any Existing Debts
Before making any effort to secure a home loan, make sure you end any credit lines that are still active. This could be from your credit card or other loans you have taken. The best option at this point would be to close any existing credit card and get a better grip on your finances.
Remember, credit cards are useful to improve your credit score only when used wisely. Once you have more control over you finances and things get better, you can apply for a new credit card and start over again.
Explain Your Situation to Banks
A problem with banks is that things like credit-worthiness are often black-and-white issues for them. If you have a bad credit score or an unfavourable financial history, you would be considered ineligible for a fixed number of years. They are bothered neither about your reasons for defaults nor about what you have done to improve your situation.
The reason for this is that banks take loan-related decisions based on the Credit Bureau Singapores (CBS) report of you. This report is just a score that is calculated based on your financial history without going into the details of your situation.
But this does not mean that banks do not wish to lend you money. All said and done, loans are one of their products and for their business to survive, customers should purchase their products.
What you can do in such a situation is an attempt to explain the reasons behind your bad credit score and highlight the efforts you have made to become more stable. Things like loan defaults do not happen just because the borrower is financially irresponsible. Incidents that are beyond your control, like medical emergencies, can also impact your finances. If you have such a reasonable explanation, convey it to the bank. Make sure you support this with documents that prove your improved financial status.
Cash Deposits and Down Payments
Save up enough money to make a cash deposit or offer a large amount as down payment to get the banks interested. There are some banks that may agree to lend you money if you make a cash deposit.
Even when you have found a creditor who is willing to finance you, offer to put a significant percentage of it as down payment to lower the interest rates. This could mean that you wait for a while till you are able to save up the required amount but, on balance, this will work in your favour.
Apply with Someone Else
If your spouse, an eligible sibling, etc., has a decent credit score, you could try applying for a loan by getting them to become a co-signatory. In some cases, this should offset the effects of the negative score you have.
However, this is not a guaranteed solution to bad credit and banks may still decide to rule against you. But even if that happens, an option you can still consider is applying for the loan in the name of the person who would have been your co-signer.
Non-Bank Institutions
If you have tried everything you possibly could and still find banks unrelenting, it is time to seek other sources of funds. Non-bank financial institutions tend to be a bit more lenient when it comes to assessing your reliability.
You may still have to settle up all your existing debts but would not have to worry too much about your bad credit history. However, the interest rates set by these institutions may be higher than those of banks. Remember to read the terms and conditions carefully before deciding to go with this option.
To sum up, even though getting a home loan when you have bad credit appears to be a herculean task, it is not impossible. Settle up all your debts and try to convince the bank of the progress you have made in terms of financial management. If that does not work, look for non-bank financial institutions.
