Bad Credit mortgages used to be nearly impossible to obtain. Nowadays, there’s a wide variety of lenders specialising in bad credit mortgages, meaning that you could still get a mortgage even if you have bad credit and have missed payments before: although you are probably best advised to use an experienced mortgage broker to help you.
What is bad credit?
Your credit file is an electronic record containing your complete financial history. Lenders can see this file if you apply for any type of credit like a mortgage, loan or credit card. All credit applications, whatever their outcome, are stored on your credit file.
If your financial history includes missed payments, too much debt or problems like bankruptcy and CCJs, this is known as bad credit and can have an impact on your success rates when applying for large loans like a mortgage. You should be aware that every instance of a missed or late payment will be lodged on your credit file, as well as how long it took to restore your file. Bad credit can also occur if you are turned down by lots of lenders, so be careful to monitor how often / where / when you’re applying for credit.
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What mortgages can I get with bad credit?
Fewer lenders are likely to let you borrow money, which means:
- There will be a smaller range of mortgages to choose from
- Those you can get are likely to be more expensive
- You will usually need a higher deposit (usually 15% or more)
This is a generalisation, however, and there are still plenty of options – even for people with really bad credit history and credit scores. Some lenders only offer mortgages specifically designed for people with bad credit. They are offered by specialist bad credit mortgage lenders rather than larger high street banks, and these days there are a large number of bad or adverse credit lenders to choose from, so in fact you may still have a really wide choice: just probably not from the main lenders. In order to access them though, you’ll need an experienced mortgage broker to help you.
These specialist bad credit mortgage lenders work in the same way as normal mortgage lenders, for the most part. As well as checking your credit record, lenders will ensure you can afford repayments on the mortgage by looking at your income, outgoings and your current / most recent past financial situation.
Using a broker or financial adviser could increase your chances, because many bad credit mortgages are only available through them, as well as them having the knowledge and expertise to place you with the right mortgage lender.
It’s essential that you find the right mortgage for you, as it’s pretty much a lifetime commitment to repay the mortgage (although you can remortgage after a few years, you don’t want to be trapped into a bad deal). Finding a mortgage broker that understands your needs is essential. Even in the current economic climate, the UK housing market has continued to grow based partly on demand for new building developments and various government supported house buying schemes. This should make finding a mortgage broker you trust easier, as there are so many to choose from – in this instance, you need to be looking closely for one that can prove they have a track record of dealing with bad credit mortgages.
What credit score do you need to get a mortgage?
Each lender has different criteria for what level of credit score they can accept, and each lender uses a different formula to reach that answer too: but mortgage brokers should be able to check your credit record and let you know which are most likely to accept you. Your credit score can definitely affect the overall cost of a mortgage – bad credit means it may cost you more to get a mortgage, in terms of both the deposit needed and the interest rate offered (which thus affects your repayment rate). Put simply, the lenders that are willing to accept you charge more because of the risk that you could miss payments.
Where do mortgage lenders see my credit score?
Your credit score is provided by credit reference agencies – like Experian and Equifax – although for the purpose of you checking your file there are a number of other free to use sites that provide the same service without charging you. Some mortgage lenders will have minimum credit thresholds which you need to pass in order to go further with them, and your mortgage broker will know which lenders to propose you to, based on your credit score and their knowledge of the market. Also, there are more flexible lenders that will not just base their decision solely on your credit score – they may just search your credit file and look at the details, rather than putting a number on it.
How do I improve my credit record?
The best way to improve your credit record is to manage your monthly finances so you’re not spending more than you can afford. Make sure you:
- Always make your repayments on time
- Stay in your credit limit or overdraft limit
- Avoid applying for too much credit
- Keep your name and address details up to date on the electoral roll
You can also:
- Challenge any inaccuracies in your file to improve your overall score
- Apply for incorrect information to be removed from your file, again to improve your overall credit score
- Make up any outstanding late or missed payments, then ensure you run your finances with no issues for at least three months before making an application
What is a credit record?
It is a record of your financial history, including details of when you have borrowed money and the repayments you have made. It shows evidence of your credit history, including:
- What you owe on your mortgage, credit cards and loans
- Whether you have made, been late on, or missed any repayments
- Any other applications for credit / loans that you have made
- Your current and previous addresses
- Any time a company has checked your credit record in the last two years
- Financial links with anyone you share an account with, e.g. joint mortgage / bank accounts
- Debt issues from the last six years, e.g. bankruptcy, defaults, county court judgments (CCJs)
When is your credit record checked?
You get credit checked when you apply for any form of credit, including applications for:
- Credit cards
- Current accounts
- Car finance
- Mobile phone contracts
- Insurance policies that you pay for monthly
Every time a company runs a credit search, this also shows up on your credit history for about two years. For this reason, you should avoid making too many applications for credit if at all possible, as it will decrease your overall credit score to have too many applications and rejections on your file.
What if I have no credit record?
If you have never borrowed money or used any form of credit, your credit record will not give lenders any idea of how well you can handle repaying a mortgage and therefore, you may have a low score – as you’ve not had chance to ‘prove’ yourself. Borrowing money and paying it off in full when it is due can improve this, as can deliberately making a purchase on a credit card and then ensuring you meet your monthly repayments to pay off the full amount owed. Your credit file will instruct you further on ways to build your credit rating.
There’s a general tendency to assume that a bad credit rating means that you won’t be able to get a mortgage, which simply isn’t the case unless your credit problems are extremely recent and / or still ongoing.
For example, if you have fallen behind on your credit card payments in the past, or have a prior instance, your credit rating may not be great but also may not prevent you from getting a mortgage. If however, you’ve missed credit card and other repayments recently, and are – or may seem to the outside observer to be – on the verge of bankruptcy at present, then it is highly unlikely that applying for a mortgage is right for you, and this will be reflected in the responses from lenders should you try.
If you have been made bankrupt at any point or have had to be put onto a debt management plan at some point in the past, you can expect to have taken a hit on your credit score, but these can be rebuilt over time and after six years neither will show up your credit file in any case.
So when considering if you should apply for a mortgage if you have bad credit, one of the things a mortgage broker – and therefore a mortgage lender – is going to be looking at is whether your credit problems are recent or in the past. Because if they are in the past, then bad credit mortgages are designed to help people with adverse credit get a mortgage. You may have to provide additional financial information and proofs, and you may have to offer a larger deposit in order to secure favourable rates.
Before you begin your application process, you should check your credit score in advance. There will be things you can do – highlighted within your credit file – that let you repair a low or damaged score. Once you’ve got access to your credit file – and make sure you sign up for one of the free ones, don’t be tempted to pay for your credit file as the free sites have all the same information – then you can follow the recommendations to improve your score prior to making an application.You should also avoid making too many applications for mortgages or other forms of credit, because doing so can often affect your credit rating negatively. The mortgage advisers at Right Mortgage UK can give you impartial advice, look at your credit score, and discuss with you what your mortgage options are.