Guide to mortgages for people with bad credit
- If you've missed credit card or bill payments, had a County Court Judgment (CCJ), or been declared bankrupt, you may find it much harder to get a mortgage, but there are ways to improve your chances
- Sub-prime mortgages - mortgages for those with bad credit - were available pre-recession, but since then have become much less common in the UK
- Gocompare.com introduces you to London & Country whose fee-free, expert advisers can help you find the right mortgage - request a call back or phone 0800-073-1959
Problems with your credit history may stem from missed payments (for example, credit card payments), a County Court Judgment (CCJ) or bankruptcy.
These can all have an adverse impact on your credit and may mean that the risk you present to lenders is too high for them to consider giving you a mortgage.
Even if you're accepted, you may face higher interest rates and/or fees, as borrowers with poor credit ratings may not have as much choice as those with good credit scores.
However, there are lenders who may consider those who might be rejected for mortgages elsewhere.
Why's it harder to get a mortgage with a bad credit rating?
So-called sub-prime mortgages - mortgages for those with poor credit - were widely blamed for contributing to the 2007-8 financial crisis, and the lessons learned during that time mean that getting a mortgage can be much harder for people with credit issues.
"Lender criteria has tightened up substantially since the credit crunch and therefore it's important for borrowers to have as good a score as they possibly can," said David Hollingworth of London & Country.
"Having credit is not in itself a bad thing. In fact applicants, with no credit at all may not be viewed that positively by lenders.
"Lenders like to be able to see that the borrower can handle credit, so having some track record of debt that is well conducted and up to date should not be viewed negatively.
"Where there's a less-than-perfect credit history things will get more complicated. Much will depend on the degree of the issue - in other words, was it a small blip a long time ago, or is it a more significant problem yet to be fully rectified?"
While sub-prime mortgages are generally considered a thing of the past, in October 2015 several lenders launched new sub-prime mortgages,† much to the surprise of debt charities, which were severely critical.
Of course, credit problems could include anything from missing a bill payment to having a home repossessed, so the impact your own credit issues have on your eligibility for mortgages will depend on the severity of your past problems.
Applying for a mortgage if you have bad credit
If you've fallen behind on mortgage payments or even had a home repossessed in the past, finding a mortgage again may prove difficult - but it's not impossible.
Your mortgage provider may ask for more proof that you can afford repayments - for example, they may want to see more payslips and bank statements than usual.
The lender will ask about your previous credit problems, including any defaulted credit card payments or CCJs.
Although relatively minor credit problems are not insurmountable, if you've been declared bankrupt in the last few years or had a recent CCJ, you may struggle to find a lender who'll give you a mortgage.
Check your credit rating
- Before applying for a mortgage it's important to check your credit history
- A number of things can affect your credit rating, from one missed payment to bankruptcy, and it's a good idea to start building it up again well in advance of a mortgage application
- One way to do this is with a credit builder credit card, but only once you feel able to handle the responsibility and repayments
- Ensuring you make the full repayments each month is one way to demonstrate to a mortgage lender that you can handle a mortgage
It's likely you'll have to wait until your bankruptcy is removed from your credit record, which can be six years from the date of your bankruptcy, and then start rebuilding your credit.
"Where any issue is small, was several years ago and was quickly rectified, it may be that a standard, mainstream lender will be able to help," said Hollingworth.
"If problems have been more recent then there might still be an option with a more specialist lender. Some lenders will be able to accept blemishes in credit history within certain parameters.
"This is a long way from the old sub-prime lenders, though, so it will be important to seek advice. The rates will also be higher than those available from mainstream lenders and the more significant the issue, the higher the rate will be."
Hollingworth added that if you're worried about your application being rejected, getting an Agreement in Principle (AIP) could be a good idea: "A decision or agreement in principle may be useful as this will conduct a score and check on the basic applicant details and indicate if they're prepared to lend and how much.
"It's not a guarantee, but it could help give some comfort before making a full application."
Improve your chances
Since the recession hit in 2007-8 it's become more difficult for people with bad credit to get a mortgage. The Mortgage Market Review in 2015 means that now mortgage providers must ask about affordability to determine whether you can afford the monthly mortgage payments and all your other outgoings.
Nevertheless, there are things you can do to increase your chances of acceptance, especially if you take action months, if not years, before you actually apply.
You may need a larger deposit if you have bad credit - for example around 20-30%, instead of 5-10%.
Low-deposit mortgages often have tighter acceptance criteria, so the more deposit you have, the better chance you have of finding a mortgage you're eligible for.
If saving more isn't an option - and borrowing money for a deposit would be risky, to say the least - there are a few ways of getting a larger deposit together.
Get help from family
Most lenders will accept a deposit if it's 'gifted' from a family member. This can't be a loan, and you must be under no obligation to repay the money.
The person gifting you the money will have to sign a form stating the conditions under which they're lending you the money - for example, whether they expect to live in the house in the future, or whether they expect to own a share of the house.
They'll also be asked whether they've consulted a financial adviser about gifting the money, and this is something you could consider doing together to discuss the repercussions of the gift.
In a number of years you may be in a position to repay the money, and there's nothing stopping you from 'gifting' the money back.
Get a guarantor
If you're unable to get a mortgage because of bad credit, a family member may be willing to be named as a guarantor.
Getting a guarantor is a big step, as you and your guarantor will be tied to each other financially. This could have an impact on both your credit ratings.
The guarantor would have a charge placed against their own house, which means that if the borrower defaulted on their mortgage payments the guarantor may be liable.
Getting a guarantor doesn't remove the need to be credit checked - if your credit is in a bad way, you may still struggle to get a mortgage.
Sort your finances
Postponing buying a home until you're in a stronger position may be a sensible idea.
Think about building your credit rating back up with good credit, saving more for a deposit and making yourself a safer proposition to lenders.
"Those that have had a bumpy ride should really concentrate on improving their profile. Building a track record to show that you're back on track will be the best way to help broaden the range of mortgage options in the future."
Speak to an adviser
Finding a mortgage if you have credit issues may be tricky, so it could be a good idea to speak to an adviser.
They'll be able to give you advice on the right product for your needs, and how best to apply for it.
You can arrange a call back from one of London & Country's expert, fee-free advisers, to go through your individual credit problems and what might be available.
By Emily Bater