If you’re finding it difficult to stay on top of your finances, there are many options available to help get your financial situation back on track. A popular alternative to Bankruptcy is to initiate a Formal Part 9 Debt Agreement. A Debt Agreement (DA) is a legal, binding agreement between you and your creditors. It outlines a new, affordable repayment schedule for you to pay off your debts. While a Debt Agreement avoids the consequences of bankruptcy, it affects your ability to apply for finance – both personal and home loans.
The extent to which a DA impacts a finance application depends on many different factors, including your individual financial circumstances. However, a major factor is whether you are still on a Debt Agreement or have been discharged.
Can You Apply for a Home Loan While On a Debt Agreement?
There is no law against you applying for finance of any kind, including home loans, during your Part 9 Debt Agreement. However, it will be extremely difficult for you to be found eligible for finance until you have been discharged from your DA. As home loan experts, we highly recommend you hold off applying for finance during your Debt Agreement. Although it differs from bankruptcy it still comes under the Bankruptcy Act 1966 and is classified as an act of bankruptcy. Any act of bankruptcy is listed on your credit file and the National Personal Insolvency Index (NPII).
When you apply for a home loan, the lender will check your credit file and notice you are in a Debt Agreement. This tells them you’ve had problems meeting your financial commitments in the past and your outgoings are probably already substantial as you’re making repayment to your creditors.
What Happens After Your Debt Agreement Ends?
Once you have been discharged from your Debt Agreement, it will still remain listed on your credit file for five years and you will need to declare your DA when applying for finance. Even though you have completed your Debt Agreement, mainstream banks will generally decline your application for finance due to your past credit history. This where non-bank lenders, can help as they specialise in assisting you get approved for a loan if you have been previously declined by other banks.
To be eligible for a home loan after you have been discharged from your DA, you will still need to prove you are capable of managing your finances. You must:
- Ensure you have a deposit saved. This has to be genuine savings (money which you have saved in a bank account over a period of at least three months) and does not include a gift from a parent or guarantor,
- Be able to show affordability of the new debt, and
- Demonstrate your Debt Agreement has been paid in full and you have been discharged. This includes examining why you needed to enter in the DA to begin with and your conduct of payment activity during the length of the DA.
Each lender has a different application process, but they will generally examine all conduct statements very closely. Any small infringement, such as overdrawing or a dishonour, will be seen in a negative light given your credit history. It is extremely important for you to have clean, spotless conduct with managing your finances before you submit an application for a home loan.
Rebuild Your Credit History to Improve Your Chances at Getting a Home Loan
Your best chance at approval for a home loan is if you begin to rebuild your credit and display healthy financial habits. For every year after you have been discharged from your Debt Agreement, your credit worthiness will improve. This gives you a better chance at being approved for a home loan. The longer you wait, the better and more favourable your credit history will be.
- Make sure you pay all of your bills on time. A record of consistent and punctual payments will help towards improving your credit rating.
- Think carefully before applying for new credit. Each time you apply, the lender will make a hard enquiry on your credit file which can negatively impact it.
- Pay off any outstanding loans and debts which weren’t included in your Debt Agreement. This may include any secured debts or joint debts.
- Keep your credit card balance low, or cancel your credit cards altogether.
- Hold onto any accounts which have a positive record of repayments.
- Pay your rent on time. Lenders will request a copy of your rental history to show you’re staying on top of your rent payments and prove you have a good payment history. This does not replace a deposit.
Is it the Same for Bankruptcy?
Bankruptcy comes with greater consequences than a Part 9 Debt Agreement, but they both fall under the Bankruptcy Act. If you are declared Bankrupt, the appointed Bankruptcy trustee will be responsible for taking control of your assets and selling them to repay your creditors. This includes your home which is not a protected asset. As a declared Bankrupt, you are ineligible to apply for finance until you are discharged. Similar to completing a Debt Agreement, once you’ve been discharged from Bankruptcy you can apply for finance straight away. However, it is up to the individual lender to approve your application.
Home Loan Experts
At Revive Financial, we know it can be difficult to get a home loan with bad credit. That’s why we specialise in providing home loan solutions for people who have been previously declined by other lenders. If you have completed your Debt Agreement or have been discharged from bankruptcy and want to apply for a home loan, contact us on 1800 534 534 for a free consultation.
For more information on bad credit home loans and how we can help, check out our bad credit home loan page here.