Not everything in life always goes according to plan – also in financial terms. So it can happen that due payments are forgotten or serious financial bottlenecks occur. In both cases, negative entries in the Credit Bureau directory can very quickly occur these days. It is a credit agency that stores both positive and negative credit rating characteristics about borrowers. If consumers want to take out a new or additional loan, any negative entries in practice can become a real problem.
Difficulties with bad Credit Bureau possible
Borrowers in real estate financing can also face serious difficulties due to negative entries in the Credit Bureau directory. This is the case when the so-called fixed interest period expires. As a rule, a remaining loan amount is open at this time, which must be financed further. To this end, a new loan agreement is being concluded at appropriately adjusted interest rates. Banks and savings banks issue a corresponding prolongation offer up to three months before the interest rate lock expires.
However, if the borrower’s creditworthiness deteriorates, credit institutions are not obliged to roll over. In this case, no further funding is possible. Depending on how serious negative Credit Bureau entries are, they may be sufficient to refuse further funding.
Follow-up financing despite a negative Credit Bureau
If borrowers in real estate financing have negative Credit Bureau entries, early action before the interest rate expires is recommended. This leaves enough time to clarify any discrepancies and to check entries.
The latter – that is, checking for negative entries – borrowers should do in the first step. Every citizen has the right to inform himself about entries concerning him free of charge once a year. A corresponding request for information will be sent by post on request and, as mentioned, is free of charge. The personal information also shows all possible negative features that can lead to difficulties in connection with the intended follow-up financing. All entries should be checked. Some of the supposedly outstanding claims may have already been paid. Others may not be authorized. If there is still enough time until the fixed interest rate expires, these can still be eliminated by then.
If negative entries cannot be (fully) clarified, this does not necessarily have to be the KO for follow-up financing. Because for most banks, Credit Bureau is just one of many credit ratings – albeit an important one. Therefore, it may be helpful to improve other credit rating features in return for the bad Credit Bureau. For example, borrowers may have other sources of income (such as a part-time job) that the lender has never heard of. Or the level of household income has increased significantly. The improvement of such evaluation criteria can lead to the loan being granted despite a negative Credit Bureau.
The subject of collateral is also sometimes a decisive factor for lenders. Therefore, the correct or best possible valuation of the financed property in the case of negative Credit Bureau entries is all the more important. The property value may have increased due to price changes since the initial borrowing. Perhaps there have been modernization measures in the meantime that have a positive impact on property value. The lender should also know these in order to realistically evaluate the property as well as possible.
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Never neglect provider comparison
Obtaining follow-up financing is of course a top priority for borrowers with a negative Credit Bureau. In most cases, an impending sale of the property can only be avoided. Nevertheless, it is important to complete the follow-up financing “not at any price”. Because this will generally be significantly more cost-intensive than it would be if the borrower had a good credit rating due to the negative characteristics.
Therefore, an extensive comparison of providers is extremely important, especially in the case of a negative Credit Bureau. The more providers are requested, the higher the chance of coming across a lender with acceptable interest rates – despite the corresponding framework. And especially when it comes to real estate financing, even small interest rate differentials can have a major financial impact. A so-called debt rescheduling to another lender can easily mean several thousand USD in cost savings. The following calculation example should illustrate the potential savings:
Assumption: A borrower with poor Credit Bureau would like to prolong his real estate financing with a remaining debt of 150,000 USD (monthly rate 800 USD). The interest rate on financing was previously 2.39 percent annually – with a fixed interest rate of 10 years. The house bank refuses to roll over due to poor creditworthiness. There is no time to clarify the entries in the Credit Bureau. Therefore, the person concerned contacts another bank that enables further financing. However, the interest rate for a fixed interest rate of another 10 years should be 4.49 percent due to risk premiums – despite continued favorable interest conditions. After a thorough comparison of conditions, another credit institution comes into question. Its conditions are 3.99 percent per year. The reduction in the rate fixation to 5 years leads to an additional 0.6 percent lower interest costs, i.e. a rate of 3.39 percent annually.
(10 years ZB)
(5 years ZB)
|Interest rate pa||4.49 percent a year||3.39 percent a year|
|Interest costs in 5 years||31,973.07 USD||23,436.63 USD|
|interest rate advantage||10,238.37 USD|
|minus additional costs||9,738.37 USD|
The incidental costs incurred for such a debt rescheduling for the notary and land registry are just under 500 USD. Nevertheless, the total savings when using offer 2 is just under 10,000 USD. Borrowers should therefore not only see the expiry of the fixed interest rate and the associated opportunity for debt restructuring as a burden, but also as an “opportunity”.
Avoid long fixed interest rates
Should borrowers achieve follow-up financing despite a negative Credit Bureau, this should have the shortest possible rate fixation period. Firstly, because their interest rate is normally lower than in the case of a longer fixed-interest period. Given the already higher interest rate on financing for borrowers with good credit ratings, this creates a certain financial relief.
In addition, the follow-on financing gives affected borrowers time to take care of the open entries in Credit Bureau. In the best case, these can be eliminated by the end of the (shorter) fixed interest period. If so, further financing would then be possible at conventional, more attractive interest rates.
The forward loan as a solution?
In connection with a so-called forward loan, borrowers can secure the interest conditions for subsequent follow-up financing at an early stage. That creates certainty. However, banks charge certain interest premiums for this. In addition, in the case of negative Credit Bureau entries, risk premiums are added, which negate the cost advantage of the forward loan, which is not always present anyway. In practice, the conclusion of a forward loan therefore makes little sense, especially from the point of view of the borrower with a poor Credit Bureau.