While having bad credit can certainly make it more difficult to get a mortgage, it’s not impossible. When you have a poor credit history, you are more limited on which mortgage deals you can access, in turn this can lead to more costly options.
What is bad credit?
If you have ‘bad credit’, or a poor credit rating, it usually means that you have missed (or been late with) some payments in the past. This could be payments on utility bills, loan repayments or any other situation where you failed to pay on time or in full.
Another thing that can harm your credit record is applying for credit a lot, or being ordered to pay someone money as the result of legal action. Ironically, never applying for credit can also damage your rating (as you don’t have a proven record of repaying money)
Your credit history is one of the key factors that lenders use to assess whether they’ll give you a mortgage, and how generous that mortgage deal may be. The good news is that lenders do offer mortgages for first-time buyers and homeowners with bad credit, and the process for getting one is similar to a ‘regular’ mortgage application.
Getting a mortgage with bad credit
Whether you want to buy a house or remortgage, remember that there are different types of ‘bad credit’ and these are treated in different ways. So first you need to get an idea of how your particular credit situation will appear in the eyes of a lender.
A lender will be reluctant to approve your mortgage if you have:
- defaulted on a loan (including a payday one)
- had items repossessed
- been issued a county court judgement (CCJ) in the last 12 months relating to debt that is secured against a property or asset.
However, after a year or two has passed, lenders may be more willing to accept your application. You might still need a large (25 per cent or higher) deposit or (if you are remortgaging) a lot of equity. This will make you less of a lending risk. Anything else you can do to convince lenders that you are low-risk is worth trying.
Lenders may be more willing to lend if your adverse credit relates to unsecured finance. This means that although you had a debt you failed to repay, it wasn’t secured against any property or assets. Lenders are often happy to accept mortgage applications if you have late payments, defaults and CCJs for unsecured finance. Even applicants who have declared bankruptcy may find success, but again you are likely to need at least a 25 per cent deposit.
It is also possible to have a good, steady source of income, but still have a poor credit history. Lenders love reliable incomes because it means you are more likely to make every payment, but the type of bad credit you have could still affect your application.
How can I get a mortgage with bad credit?
There are a couple of clear strategies for improving your credit score, but no quick fixes. Most importantly, make a real effort to pay back your debts (especially secured debts). Also get rid of things like old phone contracts or shared bank accounts that could be affecting your rating. It will take time for your credit score to recover, but making these changes now will have an impact.
Second, because you know you will be seen as a risky proposition to lenders, prepare as much as possible. Try to save a large deposit, as your lender could require you to have at least 20 per cent of the property’s value. It can be a tough decision, especially for first-time buyers, but delaying your plans by six months to focus on improving your credit score can have a big impact on the interest rates you are able to get.
Another option, if you can get help from your family, is to look at a guarantor mortgage where someone else (e.g., a parent) agrees to cover any repayments you may miss.
If you’re looking to discuss mortgage options, despite having a less favourable credit score, get in touch today.