Does a Large Down Payment on a Home Loan Offset Bad Credit?

By Angela Monroe - November 27, 2018

If you have bad credit, the chances are you’ll be looking for any way possible way to improve your credit score and get better rates and fees when applying for a home loan.

Buying a home is a huge decision for anyone. If you have bad credit, it’s understandable that you might feel nervous about the best way to go about applying for bad credit home loans. Saving up a large down payment on a home loan may be a great solution for you.

Find out how we can help you with bad credit home loans.

What is a down payment for bad credit home loans?

Firstly it’s important to understand exactly what a down payment is. This is an upfront payment that you make to purchase your home, and it is generally a portion of the price that you’ll be paying yourself rather than borrowing.

Down payments are often around 20 per cent of the purchase price of the property. So if the property is $200,000, a standard down payment may be $40,000. This could be money that you have saved up for or been gifted.

How much is a large down payment?

Anything above 35 per cent of the purchase price would generally be considered a large down payment. It’s normal for people to make some kind of down payment to reduce the amount they then request to borrow with a home loan. But if you’ve got bad credit, you may want to consider making a larger down payment.

It’s really important to remember not to stretch yourself too far financially. Before you commit to a large down payment, you need to budget carefully to make sure that you will still have enough money to cover your monthly expenditures and any existing loans that you have. This will help you to avoid defaulting on your home loan which could further worsen your bad credit.

The benefits of putting a large down payment on a home loan

There are many benefits from putting a large down payment on a home loan, if you are financially able to. A big down payment will minimise the amount that you are borrowing, so your total loan amount will be smaller, and it will be more likely to get approved.

If you have a smaller loan, you’ll also end up paying less in interest over the total loan term and your monthly payments will be lower. This is generally because by offering a larger down payment, lenders will feel reassured that you are a lower risk borrower and that there is less damage to them if you default on your loan.

It’s worth looking into whether you will still be required to pay Lenders Mortgage Insurance with your large down payment. Often an additional benefit of paying more for your home up front can mean your mortgage insurance costs go down.

What if you’re not able to make a large down payment?

Don’t panic if you’re not able to make a large down payment. It’s vital that you don’t attempt to do something that you’re not in a financial position to do, as you want to avoid damaging your credit rating further.

While a large down payment makes getting bad credit home loans easier, it’s not the only way to get approved. You may still be eligible for bad credit home loans, and you can talk to us for advice.

Top tips to save for a large down payment

You’ll need to get strict with your budget if you want to save for a large down payment. Review all your monthly outgoings and consider which areas you might be able to cut back on. Think about where you can save money in your day to day life – from transport choices to leisure activities.

Figure out exactly how much you need. Set yourself a realistic target. It’s important that you don’t try and save for a large down payment that you simply can’t afford.

Ask for help. We have years of experience helping people with bad credit home loans, and we want to help you to find the right home loan for you.

Whether you have a large down payment or not, find out how we can help you with bad credit home loans.

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.

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