Many people find themselves being in the position of not being able to buy due to having a bad credit history, and it can feel devastating if you cannot secure the required finance for your dream home.
If you're in this position, it will impact the decisions made by lenders regarding if they'll make an offer, and how much they are willing to lend you and at what cost. It is important to remember, that while it is difficult to get a mortgage with bad credit, it's not impossible.
How to apply for a bad credit mortgage
A bad credit mortgage is just like any other mortgage. You will borrow a sum of money to purchase a property and repay the loan over an agreed term. However, there are some lenders that aren't prepared to offer mortgages to applicants with a history of bad credit. Those lenders that do, often charge a higher interest rate for the privilege, to reflect what they see as an increased risk that they won't get their money back.
High street lenders are generally averse to dealing with those who have bad credit, and many of these mortgages aren't available directly to the public, which can make it pretty difficult.
When you apply for credit, it registers on your credit file. If you apply to a number of lenders to see if they will lend to you, it will be doing additional damage to your credit score.
Consequently, your best option is to contact an established and experienced mortgage broker. They will have access to contacts and deals that are exclusive and not available to the general public. The mortgage broker will carry out a ‘soft' credit check firstly, so your inquiry doesn't negatively impact your credit score.
What will a bad credit mortgage cost?
Having a bad credit mortgage, it is likely that you will be able to borrow less and have to pay more in interest in comparison to someone who has an exemplary credit record.
Mortgage offers are based on a loan-to-value ratio. Those with good credit can have a 90% LTV, this means they are able to borrow 90% of the purchase price and will need to put down a 10% deposit to cover the remaining balance.
It is less likely that you will be able to achieve a 90% LTV with bad credit, however, it is not impossible. It is also easier to get approval from a lender if you aim to borrow less. If you are able to put down a bigger deposit, there is less risk for the lender, meaning they are more likely to make a mortgage offer. A higher deposit may also result in interest rates being lower to reflect the reduction in perceived risk.
What are the most common causes of bad credit?
When you apply for credit, lenders want 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, it suggests to lenders that you can't manage your money, which in turn means they view you as a high-risk applicant.
The most common causes of bad credit are late or missed payments, which can escalate to default, and if they aren't rectified and your case goes to court, a County Court Judgement (CCJ) may be levied against you.
If you have struggled financially 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 3 main credit reference agencies in the UK: Experian, Equifax, and TransUnion. Your credit rating is made up of information gathered from lending companies and also the public record. You can request your credit file from any of the 3 above agencies.
The companies you deal with – for example, your mobile phone provider, credit card provider, bank, etc. – share customer information with the agencies about how promptly bills are paid, how much debt a customer has. Public records provide information regarding CCJ's bankruptcies and IVA's, including information held on the electoral roll. The credit reference agencies collate all of this data and create a credit profile in order to generate a credit score.
Mortgage lenders use data to decide whether or not they want to lend money to you. Their answer will be dependant on your score. They may include extra conditions or charge you a higher interest rate.
Any adverse credit you have acquired will be removed after 6 years and the further in the past they happened, the less impact they will currently have.
What can you do to improve your credit score/position?
There are numerous ways in which you could improve your credit score, which may result in a better rate on your mortgage. It is important to remember that this is a continuous process and it is unlikely that you'll see results quickly.
Firstly, you'll need to get a copy of your credit report from a credit agency and check the information they hold is accurate and ensure you ask for any errors to be corrected.
If something that has happened that was out of your control and is the underlying cause of things such as missed payments, make sure you pass these details onto the credit agency. For example, if you are self-employed and you had an accident it is essential this information is known to the agency. It won't remove it from your credit file, but a note can be added stating what happened – which might help with future credit applications.
It is important to avoid running up additional debt and especially avoiding payday loans as these are seen as a sign that you're not able to manage your finances effectively. It is also very important to ensure you're paying your bills on time and that you aren't paying more than you need to for anything. Lastly, make sure you are registered on the electoral roll.