How to Get a Mortgage (Even with Bad Credit!)
31st Jul, 2019
How to Get a Mortgage, Even With Bad Credit
It’s not a stretch to say that a lot of people, especially younger folk like millennials, find it tough to picture themselves ever climbing onto the property ladder. Myriad reasons can create roadblocks to this goal, some subjectively positive and others objectively negative, especially when considering how the housing market still has a high entry fee.
Staying close to family and living at home, the freedom & flexibility to move with rent and the lack of serious responsibility for maintaining a property can be appealing elements for avoiding a mortgage, but many would consider the benefits of home-ownership to outweigh the benefits of the alternatives.
Studies have shown that roughly a third of millennials believe that they’ll never be able to afford a home either, especially when similar studies have shown that almost half of people in their 20s have no savings whatsoever. Even when considering the lowest deposits on the market and various methods to secure a first mortgage, the thought of getting the keys to their very own home seems almost impossible.
One of the greatest obstacles to finding a mortgage can be something that can challenge anyone, regardless of their age; bad credit.
It isn’t difficult in these modern times to find yourself slipping out of the black and into the red, whether it’s from the odd missed bill payment or a CCJ (county court judgments). These, along with many, many other elements, can damage your credit rating and make you seen as much more of a risk for mortgage providers.
What is a Mortgage?
To cover the topic fully, let’s take a quick look at what a mortgage itself is. A large loan that is paid off over approximately 25 years, a mortgage is specifically designed by a bank or building society to lend enough money to buy a property. It is always important to note that if repayments on mortgages aren’t fulfilled then the house may be repossessed; this note is always displayed at the top of any discussion about mortgages and for very good reason; it shows how serious one should be when considering a mortgage.
There are many different types of mortgages, some of which can be taken out over shorter or longer terms, but each type adds interest to the amount you borrowed and requires a deposit. The size of the deposit varies from mortgage to mortgage, with some like the government’s ‘Help to Buy’ scheme only requiring 5% of the overall property value, average mortgages needing 10% and some, higher interest mortgages asking for up to 20%; this latter category often hosts ‘bad credit mortgages’.
What is a ‘Bad Credit Mortgage’?
Strictly speaking, there’s no such thing as a ‘bad credit mortgage’; that is to say if you walked into a bank and asked to see their ‘bad credit mortgages’ they wouldn’t have a portfolio full of mortgages listed under that name.
There are plenty of mortgages available to people with a poor credit history though, which is what ‘bad credit mortgages’ commonly refers to. It’s also worth noting that some specific mortgages cater to those with a poor credit rating due to unfortunate circumstances, such as those who have suffered from serious illnesses, have become widowed or divorced.
For the sake of making things simple though, a ‘bad credit mortgage’ is generally the term used for mortgages that require higher deposits (as proof of being a more trustworthy applicant), charge higher interest rates or are willing to overlook a less-than-perfect credit rating.
Why might I need a ‘Bad Credit Mortgage’?
There are several reasons that you may need a ‘bad credit mortgage’, all of which can contribute to your overall credit rating. Some are major red flags to a lot of banks and lenders, whereas others can be discussed to ascertain your specific circumstances and reasons. However ‘severe’ these elements are, these ‘red flags’ are considered ‘black spots’ on a record and can remain for years.
There are different levels of how serious these black spots are, of course, and some negative elements may even be a lack of black spots; this includes what’s known as a ‘thin credit file’. A ‘thin credit file’ is essentially a lack of any records indicating a person has any dealing with banks in the past which, initially, sounds like a good thing.
No credit card, no debt; never spend money you don’t have. Sounds responsible, right? Well, lenders see it as a lack of proof that you could repay anything. It’s the equivalent of having years of experience as an artist yet having no portfolio of work; you may be subjectively trustworthy but without any clear proof there’s no way they can trust you.
Some clearer black spots are failures to pay bills on time. As far as black spots go, these are the least serious (with one notable exception), with many mortgages lenders letting one or two missed payments slide. That is if they’re for the likes of phone bills; any missed mortgage payments are considered extremely negative. Remember the warning about houses being repossessed?
CCJs, which occur when you are ordered to repay money to someone that you are indebted to, also serve as fairly large black spots on a record. Alternatively, there are arrangements known as IVAs (Individual Voluntary Arrangements) that are essentially CCJs that you volunteer to make, albeit in the form of separate payments instead of one complete repayment. With each of these, a bank or lender will consider how long ago a CCJ or IVA was in place and whether it’s been fully paid yet. Of course, if either a CCJ or IVA has been fully repaid and was far back in the past this will be less of a pressing black spot, but they will be a black spot regardless.
Finally, there’s bankruptcy. Bankruptcy is essentially the endgame of debt, which should only be declared in the utmost dire of financial situations. In cases where this is unavoidable a bank or lender will take a very serious look at the conditions and circumstances in which you declared bankruptcy and will inquire how your conditions and circumstances have changed ever since.
What can I do to improve my poor credit rating?
It may not be an easy process, but there are certainly a variety of methods for fixing your credit rating. Whether it’s by repaying outstanding overdrafts, proving yourself as a reliable credit user and even utilising external assistance.
There are some clear means of improving a poor credit rating to find a mortgage. Waiting and giving your credit rating time can make any less-than-ideal choices, mistakes or financial hardships seem less serious. If your financial situation has gotten better over time then the distance between you now and then will be reflected in a far better light. To elaborate, establishing a more stable financial situation, such as showcasing reliable and responsible credit usage and consistent payments, makes you seem like a much more trustworthy applicant.
Of course, if you’re applying for a mortgage with a partner then it’s to be expected that their credit rating will also be taken into account. If they have a flawless credit rating then that can only be an advantage, though it may be a little disparaging if your less-than-perfect credit rating causes any issues. This may result in having to present yourself as a lower risk, which would mean having to provide a higher deposit.
Another thing to consider when approaching a mortgage with bad credit is, surprisingly, the human element. This isn’t to say that bringing in muffins to a bank will help, nor will crocodile tears (in fact, that kind of approach would probably do more harm than good!), but to approach the mortgage process with a bit of common courtesy and respect for those making the decision.
Having an explanation for your past financial woes, as well as how you’ve placed those problems in firmly in the past, will display the kind of humility and self-awareness that a lender may see as a sign of a responsible applicant. Being honest about any kind of bad credit you have that might be tough to find will also go a long way; there will be people working on conducting in-depth and detailed searches on your credit history, and if they find anything you haven’t mentioned it’ll look like you were trying to hide it, which is undeniably a crimson red flag.
What is a mortgage advisor?
A very good place to start when attempting to pursue a mortgage is to speak to an Independent Mortgage Advisor. These are advisors who provide financial advice and support on your various mortgage options; whether you’re unsure of how your credit rating can affect your choices or you’re actively seeking a ‘bad credit mortgage’.
Independent Mortgage Advisors are unbiased, not conforming to any particular lender or bank, so their impartial advice will be able to steer you in the right direction and find a mortgage broker that best suits your circumstances. When it comes to mortgage brokers there are those tied to a specific leader (i.e. a bank), those that focus on deals from a limited list of lenders and those that open their range to the entire market of mortgages.
Discussing mortgages with banks or lenders one-on-one might yield a handful of options, whereas an Independent Mortgage Advisor can bring a whole host of choices to the table. Though they’ll charge you for their services (usually 0.35% of the transaction) what they offer you during the process of securing the right mortgage can be invaluable.
What options do I have for a mortgage with a poor credit rating?
A positive to take away is that, yes, it is possible to get a mortgage with bad credit, with pros and cons for these mortgages. Many would suggest that it’s better to wait before looking for a mortgage, improving your credit score until you can get a mortgage with a lower deposit and lower interest rates, but there are undeniable advantages.
As well as obviously being able to own your own home sooner, an advantage of applying for a mortgage early is that research (conducted by Which?) revealed that over 1,600 mortgage deals specifically available for those with bad credit, so even with poor credit there are plenty of options.
Though a poor credit rating will prevent securing a mortgage from many lenders and banks, some elements on their own can even impact open-minded providers. For example, Darlington BS won’t accept applicants with poor credit though with will accept people with one CCJ up to £500, people with IVAs if paid off more than three years ago and people with bankruptcies that have been discharged more than three years ago.
Below is a list of lenders and banks that, as of March 2019, do accept people with a bad credit score.
These mortgages that consider bad credit and mortgages that do accept applicants with bad credit can offer a glimmer of hope for those with a poor credit rating. Keeping your options in mind and investigating these possible banks and lenders with your circumstances in mind would be wise, so be sure to talk through these mortgage options with these lenders or an Independent Mortgage Advisor.
It’s always important to remember the gravity of a mortgage and to consider your options seriously. Those seeking a ‘bad credit mortgage’ may do well to be patient and work on their credit rating first as even the act of applying for a mortgage can impact your credit rating. Much like applying for a credit card, overdraft or loan, if you are rejected during an application this will serve as another black spot in the future.
It’s been mentioned several times in this article alone, but it is truly vital to remember that if you do manage to secure a ‘bad credit mortgage’ you will be under more scrutiny than regular mortgage applicants and thus, the warning of a house being repossessed if missing mortgage payments should be taken even more seriously.
As aforementioned, one of the smartest things you can do when considering a mortgage, bad credit or not, is to consult with an Independent Mortgage Advisor. Here at Radcliffe and Rust, we specialise in offering mortgage advice in Cambridge, so if you need help finding a mortgage, whether it’s a standard mortgage, one with a government help-to-buy mortgage or even a ‘bad credit mortgage’ then take a look at how we can help you.