How to get a Mortgage with Bad Credit
From recent debt arrears to having a house repossessed, people have bad credit to their name for all kinds of reasons. Whilst these problems can make a mortgage approval more complicated, they don’t have to be a deal-breaker if you know where to turn.
If you’re one of the many who have a bad credit history, the good news is that the market is vast and all sorts of lenders have mortgage offers out there, not just for those with a perfect credit score.
It doesn’t matter if banks or other forms of mortgage lenders have turned you away in the past because you might be able to secure a poor credit mortgage loan with the right advice.
What is Bad Credit ?
You may believe you have poor credit because in the past you have been turned down for credit. Note, however, different borrowers have different loan standards – some lenders may see you more favourably than others. There is no hard and fast guideline on what is called poor credit.
There are, however, some items on a credit report that will make certain borrowers believe you’re a greater risk – such as skipping credit card fees, defaulting on a loan and asking for more credit than you can afford to pay back.
When you think you have a poor credit rating, applying for a free account to get your credit score is a smart idea – that would give you an indication of your financial status and how borrowers will see you.
Do I have Bad Credit ?
There are a number of things that can affect what your credit rating is. Many of them may be more difficult to figure out than others but there are a couple of items that can certainly significantly impact your credit ratings.
You will take a hit to your credit score if you have been bankrupted at some point or put into a debt relief programme. Your credit record could also be impaired if you’ve ever dealt with credit card repayments or personal loans.
The reason you get an adverse credit rating is that you fell behind on the terms and conditions specified on your loan. This means that you are now considered a higher risk client because you have a history of not keeping up with payments.
Bad credit is anything on your credit report that may put off borrowers offering you a mortgage, including:
- Missed credit card payments, deposits, mortgages or other debt repayments
- Overshooting your agreed limit or overdraft sum
- High debt rates
- Too many demands for further credit (e.g. mortgages or credit cards)
- Dent issues such as fraud and county court decisions (CCJs)
- Sharing an account with someone who has debt problems
How do ‘Bad Credit’ Mortgages work ?
‘Bad credit’ mortgages are much like normal mortgages. Often, the difference is that they are likely to have increased interest rates, and the amount you can borrow may be reduced.
You may also be asked to make a bigger investment of at least 20-25% of the property’s worth, rather than 5-10%. This is because the investor may perceive getting a lower credit score as a high risk.
The higher your credit score, the better the odds of being approved and getting lower interest rates.
Can I get a Mortgage with Bad Credit ?
Yes, it’s usually possible to get a mortgage with a bad credit history, even if the choices may be limited.
Lenders will run a background check on whoever applies for a mortgage. However, some black marks on your credit sheet, based on the amount of money invested and how much time has elapsed, will bear more weight than others.
If you have a poor credit background, some high-street banks can refuse to give you a lump sum mortgage.
Building societies may also be more flexible and professional bad-credit mortgage borrowers are also available, some of which expressly care for those who have faced sickness, divorce or other traumatic life events.
Such borrowers tend to be more flexible in considering the demand for a mortgage, but they also charge higher than normal interest rates and request bigger deposits in exchange.
How to Get a Mortgage with Bad Credit
When you have a poor credit history, there are a variety of actions you should take to boost your mortgage chances.
- Give it time – faults in your record may be considered less severe over time, particularly if your financial status has changed.
- Consider your partner’s debt – shopping with a partner would mean taking into account their credit history as well as yours.
- Fix your credit history – create a pattern of regular payments and conscientious credit use.
- Track your expenses – consider cutting costs whenever you can, while keeping your monthly performance stable.
- Periodically check your credit report – make sure it’s up-to-date and reliable. If you consider something that needs to be corrected, please call the lender concerned and apply for an extension.
- When you have a clear excuse for previous financial problems, such as illness or poor health, consider inserting a clarification notice for borrowers to include in your report.
What is a Bad Credit Mortgage Lender ?In simple terms, they are mortgage lenders dealing with customers with poor credit records. Although some conventional lenders can turn away these borrowers, specialist lenders base their judgment on the nature of the problem, its size and age, and how closely the borrowers meet their other eligibility requirements. There are various categories of poor credit mortgage borrowers including…
- Lenders for first-time homebuyers with bad credit
- 2nd mortgage lenders for customers with bad credit
- Low/no credit score mortgage lenders
- Lenders who deal with some other form of bad credit
How do mortgage lenders determine eligibility ?
When bad/poor credit is a concern, there are two key factors involved in lender assessments:
- The type/seriousness of the problem
- The date it was registered
The type of credit issue
As you would imagine, most borrowers would take into account the nature of a credit problem when assessing eligibility for a mortgage loan. This means missing bill or loan payments are usually treated with a greater degree of leniency than more severe cases (such as a recent bankruptcy, for example).
The date of the issue
Many poor credit background mortgage borrowers appear to prefer claims submitted by people with previously older examples of negative credit problems (as compared to more recent misdemeanours).
Others may require clients to reapply for a loan after a certain period of time has passed. For example, someone who has undergone bankruptcy will not be allowed to apply for a mortgage until they have been discharged (which typically takes around twelve months), However, most borrowers will rely on a three or four-year duration as well as a decent financial rating in that time before accepting a loan request.
Likewise, mortgage prices for homeowners who have had a home repossessed within the last three years are typically high but steadily reduce with each passing year.
The principle here, of course, is that the longer the borrower has managed to keep up with financial stability without problems, the lower the risk of lending.
What is a Bad Credit Mortgage Lender ?
In Addition to my Credit Score, What Else Affects my Credit Rating?
Although a mortgage broker may look at your financial records before considering your application, they will also base their loan judgment on the following criteria:
Your salary and job status : The more earnings you have, the more you could borrow, so how you earn your money will also be of concern to the lender. Whether you are self-employed or making a significant sum by incentives, overtime or commission, a specialist lender may be required.
Your deposit : The minimum deposit balance you’re going to need on a residential property is 5% (although certain companies prefer more) or 15% for a buy-to-let. However, depositing more will minimise some of the perceived risks on your credit score.
Your age : Some lenders do not cater to borrowers above 75, some 85. And a few will lend without an upper age cap, as long as they are sure the borrower will keep up with their mortgage payments.
Your outgoings : Other big outgoings (such as unpaid debts or dependent kids) can impact the amount you may be able to borrow.
Property type : Constructions that are not the standard category, such as timber frames and a thatched roof, might require a loan from a specialist.
Remortgaging with Poor Credit
Remortgaging with bad credit is typically possible but if you have the time, it is worth trying to boost your credit score. Timely servicing of your monthly mortgage would help you create a better financial profile (assuming your loans are still paid off on time).
If your credit rating has gone up with a specialist lender after a period of time, a high-street lender may be available to remortgage. Whether you can secure a better rate will depend on your credit score, your income, the current value of your property and the equity that you hold therein.
The prospective lender will also be carrying out affordability calculations to ensure you can afford future payments at the new rate.
There are a number of remortgage offers available on the high street, with prices close to those offered above in the home movers tables, so it’s worth shopping around. Generally, you have to pay remortgage fees, which can also be a consideration in making your choices.
How can I Raise my Credit Score ?
If you have a poor credit rating then you should also do certain things to boost it. Improving your credit record will raise the chances of you being accepted in the future for mortgages and other forms of loans.
Beyond that, it also ensures that you potentially won’t have to spend too much interest on future loans.
- Don’t get behind on debts or mortgage repayments
- Apply yourself to the electoral register
- Don’t have any outstanding bank cards
- Use a builder credit manager card
- Take out loans with a guarantor
None of these items absolutely guarantees your credit score will go up, but it’s possible that if you stick to doing the things on this list, you’ll have an overall boost in your credit score.
One rule that usually extends to those with poor credit before they get a mortgage is that you can test your credit score in advance. It will allow you to know where you stand when it comes to applying.
Another thing you should be doing is actually comparing mortgages out there on the market. In doing so, you’ll get a clear idea about what kind of mortgage rates are available and you will also know approximately what to plan to pay.
You can also stop making too many mortgage submissions because doing so will also adversely impact your credit rating. That’s why it’s a great idea to go to a bank and speak “unofficially” to someone about what the opportunities are and how likely you’re going to get a good purchase.
It might be a smart thing to chat with your current account provider too. This will help you to clarify your condition and the reasons why your credit rating is bad. There may be no mortgages on sale that are appropriate for your needs, but it stops you from making an unwanted demand.
Although it is possible to secure a mortgage with bad collateral, it could be more difficult if the credit problem is a repossession or bankruptcy, because these are perceived by most borrowers to be the most serious forms of adverse ones.
Things like a delayed phone bill payment at the other end of the spectrum are the hardest to forget for the borrowers.
Although some borrowers use a credit score, and you’d need to get enough score on your credit report to satisfy their loan criteria, some would do a credit check that looks at your financial record and determine a choice to lend. So they don’t worry about your real credit score.
Your credit score is based on reports from the three main credit rating firms in the United Kingdom: Experian, Equifax and Callcredit. Experian’s highest ranking is 999 and you get a decent evaluation with a score of 700 and above, while anything above 800 is considered outstanding. Equifax’s ranking is out of 700 and by their standards, everything 475 and above is excellent by their standard.
The minimum deposit threshold on a UK residential home is 5% or 15% on a letting purchase, but if you have adverse ratings, certain borrowers can only give you a mortgage if you put in extra, depending on the age and nature of the issue.
For example, once they put down a deposit of 25%, those with a repossession against their name can secure a mortgage from specialist borrowers within 1–3 years.
Anyone in an independent voluntary agreement (IVA) will require between 10-25% contribution, based on how long the loan is left to run, and those with bankruptcy in the first three years will need from 15-25%.
Sure, your credit score will increase for several months or longer if you keep up with the repayments every month.
It’s possible as there are 2nd mortgage loans that target poor credit buyers, and some borrowers who provide these products to customers in the market for third-party properties. However, where second and third homes are involved, they are tough to come by.
Many borrowers usually look at the past six years, as six years is the longest length of time that certain credit problems will stay on the account.
However if within this time period you have an unresolved negative, it might also be possible to secure a mortgage, based on the nature of the problem and when it was registered.