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Don’t let bad credit discourage you from exploring your mortgage options. Rest assured, we have assisted hundreds of mortgage clients, including those with bankruptcy records, in finding suitable lenders and gaining approval.
What is bad credit?
When it comes to securing a mortgage, there is no specific definition of bad credit because each credit provider will view your circumstances differently, some more favourably than others.
However, the biggest contributing factors are missed payments or defaulting on credit commitments as well as applying for credit too often.
Some types of adverse credit have a harsher impact on your ability to borrow. For example, County Court Judgements (CCJs), bankruptcies and mortgage arrears or repossessions will have a far greater impact than the odd late payment on your credit card.
However, it must be said that it’s still possible to secure a mortgage with all those mentioned.
Whilst most adverse credit will remain on your credit file for up to 6 years, time is a healer, and as time goes on, the impact of adverse credit will lessen if you’ve maintained good credit conduct since.
There are numerous credit reference agencies that will provide you with a copy of your credit report and give you an overall risk profile score, this is the best indication you’ll get as to your creditworthiness. Check my File, Experian and TransUnion are three of the most commonly used credit reference agencies.
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Having defaults in credit
A default is when a customer has failed to maintain their credit obligations and fallen into arrears, they can remain on your credit file for up to 6 years.
It’s not only financial institutions like banks or credit brokers that can initiate a default notice. They are also commonly issued by the utility and mobile phone providers.
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A large proportion of adverse credit issues are caused by customers not updating their postal address with credit or utility providers, creditors are often writing to customers at a previous address.
Defaults can seriously impact your credit for long periods of time and can often be for only very small amounts, sometimes less than £100.
Whilst a default can make securing a mortgage significantly harder, it’s not impossible. If the adverse credit is not recent or still outstanding, you’ll have access to more lenders and likely cheaper rates.
As with all other forms of adverse credit, there are lenders who specialise in adverse cases and take a more holistic view of their finances.
Having a CCJ
A CCJ is a County Court Judgment. This is where you have failed to make your financial obligations, and someone has taken you to court to recoup the funds owed and won, or you have failed to respond. They can often be issued for what may seem like relatively trivial issues, for example, unpaid car parking fine.
If you pay the CCJ within 28 days, you will be removed from the register, and it will not show on your credit file.
They are registered on your credit file for 6 years and make applying for a mortgage with mainstream lenders significantly more difficult – but not impossible.
Can I get a mortgage with bad credit?
Mortgage providers’ criteria for adverse credit varies enormously, and some lenders specifically specialise in mortgages for people with bad credit.
Some lenders will have a blanket policy on adverse credit, and others will take a more holistic approach.
For example, a lender may state that if you have more than 2 missed payments or defaults within the last 12 months they will not consider your application.
Some lenders may have no set policy on adverse credit and will base their decision on your credit score and overall risk profile. Whilst others may take a more understanding view of your situation and offer a bespoke underwriting service.
Specialist adverse mortgage providers will generally charge more than your traditional high street banks or building societies because of the perceived higher risk.
If you do find yourself in a position where you are applying with a specialist lender at a higher-than-usual rate, you are not bound to stay with adverse lenders for the remainder of your mortgage.
If you can improve your credit profile prior to your next mortgage renewal, you could potentially remortgage away to a mainstream high street lender, hopefully at a lower rate.
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How do bad credit mortgages work?
Adverse credit mortgages work in exactly the same way as regular mortgages. Depending on the type and level of adverse credit, you may find you have a far smaller choice of lenders to choose from. Lots of lenders will insist on larger deposits, potentially 15% – 25% of the property value, compared to 5% – 10% on regular mortgages.
You may find the interest rate and charges are higher with adverse credit mortgages, and this may mean you have higher monthly mortgage payments and pay more total interest over the term.
Adverse credit mortgages are usually subject to potentially lower loan-to-income ratios, which may mean you can borrow less money than with a traditional mortgage provider.
What interest rates will I be offered with bad credit?
The interest rates offered will depend on several factors, the market conditions at the time, the product type offered and the level and type of adverse credit. Whilst adverse specialists have higher interest rates that are typically 2-3% above the rates offered by high street banks and building societies, it may be the case that your mortgage can be placed with a mainstream lender if the adverse credit is not too recent and/or you’ve got a big deposit, you may be able to apply with a mainstream lender at standard interest rates.
Should I buy a house with bad credit or wait to improve my score?
This will depend on your own individual circumstances. Firstly, check with a mortgage broker to see if you can get a mortgage in your current circumstances so you are aware of all your options.
If you’ve had bad credit, the interest rates may be higher than on regular mortgages. You will need to ensure you’re comfortable with the monthly mortgage repayments, which will help you decide if you’d be better off waiting until your credit improves, when you may be eligible for cheaper rates or buying now and accepting a higher rate.
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There’s no guarantee that if you wait you’ll be eligible for cheaper rates in the future and it’s worth considering the cost of alternative accommodation if you decide not to buy initially, for example, does the cost of renting somewhere else for say a year outweigh the additional interest you may pay on an adverse credit mortgage.
Take a look at our Mortgage Calculator to see how much you could borrow.
How can Strive Mortgages help?
Securing a mortgage with bad credit can be tough, but it’s not impossible.
Having a broker who is experienced in arranging adverse mortgages will give you the best possible chance of success with your application. If you’re in a position to be able to apply for a mortgage, that’s great. However, if you’re not, we will work with you to devise a plan for the future.
For more information on mortgages for individuals with bad credit, please contact a member of the Strive team, by emailing [email protected] or call us on 01273 002697.
Frequently asked questions about adverse credit mortgages
Some lenders view the use of payday loans negatively when assessing a mortgage application.
Payday loans often have significantly higher interest rates than most other forms of borrowing and, for this reason, are often only taken in emergencies when someone has no alternative. This may increase the likelihood the customer may default on any further credit commitments.
Time is the biggest healer, and a clear track history of good account conduct will help. Mainstream lenders like to see at least 12 months without blemishes on your credit report, although it’s still possible with the odd occasional blip.
If you do have any outstanding defaults or arrears, it’s worth clearing them if possible. Outstanding defaults and arrears have a greater impact than ones that have been satisfied.
Register on the electoral roll, even if you don’t vote. This helps with your credit score because it allows the lenders to verify you live where you say you are.
Try to utilise all your credit commitments, it may cause alarm bells to a lender if you’re maxed out on your credit card or overdraft limits.
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Jamie Elvin
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