Bad Credit Mortgages
A common question a lot of people want the answer to when they’re applying for a mortgage is “Can I get a mortgage with bad credit?”.
Your credit rating is used by mortgage lenders to assess your affordability and essentially gauge whether you are a reliable borrower. Therefore, it’s no surprise having bad credit can hinder you when it comes to getting a mortgage. But, the issue occurs when a lot of people avoid ever applying for a mortgage because they have bad credit, because they are unaware of the options that may be available to them.
We have busted the bad credit myths and put all the information you’ll need to know surrounding bad credit, so you can have a clear idea on the next steps you need to take when it comes to securing a mortgage.
Types of Bad Credit
It’s important to be aware of the common types of credit that will have an impact on your credit file and potentially cause complications upon applying for a mortgage:
- CCJ
- Bankruptcy
- Defaults
- Missed payments
- Payday loans
- Debt management plans
With the current climate, payday loans have been increasingly popular. Whilst they won’t potentially impact your ability to apply for a mortgage, they will stay on your credit file for six years and some lenders won’t even consider you for a mortgage if you have taken out a payday loan in the past 12 months.
Approach a Mortgage Broker
If you do have bad credit, approaching your high street bank can often lead to rejection of a mortgage, because they deem you as a high risk borrower and as they only offer one product, your options are therefore very limited.
Mortgage Brokers have access to a panel of over 50 lenders, which includes specialist lenders who will work with people who have bad credit. They can also assess your credit file and work out why you may have been previously rejected as often, people are unaware of what’s actually showing on their file.
It’s worth noting that bad credit mortgages do tend to have a higher interest rate due to the increased risk level, so you should expect your monthly remortgage payments to be higher than average.
Deposits
If you are applying for a bad credit mortgage, it’s likely you’re going to need a minimum deposit of 15%.
As is the case with most mortgage types, the deposit amount will vary from person to person and on the mortgage lender. With the addition of bad credit, your deposit amount is likely to vary depending on the severity of your credit file.
Gifted deposits are also still an option if you are struggling to obtain a higher deposit amount on your own.
The Process
If you’re approaching a Mortgage Broker to obtain a bad credit mortgage, one of the first things you will need to do is have an honest conversation regarding the current state of your credit file, so they can get an understanding of what they’re going to be working with, they are also likely to obtain a full copy of your credit file to ensure complete transparency.
Packagers
In the case of severe bad credit cases, you may need to consult a packager throughout the mortgage process. A packager is essentially a middle man between a broker and a particular lender.
Due to the severity of some bad credit cases, a broker is unable to access some lenders directly, so this is where a packager is used. Lenders of this nature favour using a packager because they know the lenders criteria inside and out – making it easier for a lender to accept an adverse credit case.
Credit Reference Agencies
There are a few different credit reference agencies that you can obtain your credit report from. But, it’s important to note that the contents of your file and your credit score can differ between each one, eg – Experian and Equifax could provide you with varying credit scores and contents on your credit file.
While lenders may only do a soft check initially when you apply for a mortgage, they will always carry out a wider credit check to ensure nothing is missed. Mortgage brokers can also carry out a wider credit check so you are aware of what’s on your full file before you start applying for a mortgage.
Credit Scores
It’s common to have a sole focus on your credit score and assume this is the only measure a lender will use to accept or decline your mortgage application.
However, lenders don’t actually heavily rely on your credit score – the main thing they want to know is the contents of your credit file and they will then use their own internal scoring systems to determine whether they are willing to lend to you.
Joint Mortgage Applications
If you are entering a mortgage and one of you in the partnership has bad credit, this will not directly affect your credit rating. However, it will impact the lenders you approach with your mortgage application if you are applying together.
Repairing your Credit File
There are ways you can improve your credit file in order to increase your chances of success when it comes to a mortgage application:
- Ensure you keep up with any payments going forward
- Ensure you’re registered on the electoral roll
- Get a repair credit card
