A guide to getting a mortgage with bad credit

It can feel devastating if you have your heart set on a new home – whether it’s your first or you plan to move – and you aren’t able to secure the necessary finance. However, that’s the position many people find themselves in, as a result of having a bad credit history.

If you’re in that position, it will impact on a number of decisions made by lenders – not just whether they’ll make an offer, but how much they’re prepared to offer, and at what cost. It’s important to remember that while it may be more difficult to get a mortgage with bad credit, it certainly isn’t impossible.

How to apply for a bad credit mortgage

A bad credit mortgage works just like any other mortgage – you borrow a sum of money to buy a property and repay the loan over the agreed term. However, not all lenders are prepared to offer a mortgage to people with a history of bad credit, and those that do generally charge more for the privilege, to reflect what they see as an increased risk that they might not get their money back.

The main high street lenders are generally averse to dealing with people with bad credit. Also, many bad credit mortgages aren’t available direct to the public. That makes going it alone a tricky business.

Every time you apply for any kind of credit, it registers on your credit file. If you take a scattergun approach and apply to a number of lenders to see what they say, you could be doing additional damage to your credit score.

Consequently, your best bet is to contact an established, experienced mortgage adviser.

A mortgage adviser will have access to contacts and deals that aren’t available to the general public. They’ll be able to conduct a ‘soft’ credit check in the first instance, so your enquiry doesn’t adversely impact your credit score. They’ll often also save you time, stress, heartache – and money.

What will a bad credit mortgage cost?

When it comes to the cost of a bad credit mortgage, you have to be ready for two main issues. Compared to someone with an exemplary credit record, you'll likely be able to borrow less, and the loan will probably cost you more.

Mortgage offers are based on a loan-to-value (LTV) ratio. People with good credit could typically expect to enjoy a 90% LTV, which means they'll be able to borrow 90% of the cost of the property, and will be expected to put down a 10% deposit to cover the balance.

It’s not impossible to achieve a 90% LTV mortgage with bad credit, but it’s less likely. It’s also easier to get a ‘yes’ if you aim to borrow less. The bigger the deposit you are able to put down, the more the risk to the lender is reduced and the more likely they are to make a mortgage offer. An added benefit is that the interest rate may also be lower than if you were to borrow more, to reflect the reduction in the perceived risk.

What are the most common causes of bad credit?

When you apply for credit, lenders aim to verify two things: that you are who you say you are and that you have a proven history of paying your bills on time. If you have a poor credit score, then that suggests to lenders that you can’t manage your money, which in turn means they view you as a high-risk applicant.

Probably the most common causes of bad credit are missed or late payments. That can escalate to a default, which is a series of missed payments and, if matters aren’t rectified and the case goes to court, a County Court Judgment (CCJ) may be levied against you.

If you have been in financial difficulty and entered into a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA), that will count against you, especially if it is still active. The same is true if you have been declared bankrupt.

Different things carry different weight. For example, missed mobile phone contract payments have less impact than missed mortgage payments.

If you have rarely or never had credit before, and so have no way of showing good financial management, that can also count against you.

How do you know if you have bad credit?

There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion (previously Callcredit). Your credit rating is derived from information gathered from lending companies and also the public record.

The companies you deal with – your mobile phone provider, credit card provider, bank, etc. – share customer information with the agencies about how promptly your bills are paid, how much debt a customer has, and so on.

Public records provide details about things like CCJs, bankruptcies and IVAs, plus information held on the electoral roll. The credit reference agencies collate that data and combine it to create a credit profile, and to generate a credit score.

Lending companies use that data to decide whether to lend money to you. Depending on your score, they’ll say yes or no, or perhaps say yes, but with conditions attached. That generally means you get your money, but perhaps not as much as you asked for, and at a higher rate of interest.

Any adverse credit events are removed from your record after six years and the further in the past they happened, the less impact they will have now.

If you want to check your credit score, you can request a copy of your credit file from each of the three agencies. They each collect different data, so you need to check all three.

What can you do to improve your credit score/position?

There are a number of ways in which you might be able to improve your credit score, meaning that you may be able to get a better rate on a mortgage. However, it’s important to remember that this is a continuous process and you're unlikely to see fast results.

First, get a copy of your credit report from each of the UK’s three credit reference agencies and check that the details they hold are accurate. Ask for any errors to be corrected.

If something outside your control happened that was the underlying cause of things like missed payments – say you were self-employed and had an accident, or your employer went bust and left you in the lurch – pass on the details to the credit reference agencies. It won’t remove the details from the record, but they can add a note explaining what happened, which might help with future applications for credit.

Avoid running up additional debt, and especially avoid payday loans – they’re seen as a sign that you can’t properly manage your finances. It’s also important to pay your bills on time and make sure you aren’t paying more than you need to for anything, or for anything you aren’t using (like that gym membership!). Finally, make sure you’re registered on the electoral roll.

Next steps

Please get in touch with us for more guidance on how to secure a mortgage with bad credit. We’ll be happy to answer any questions you may have.