HAVING bad credit can make it harder to get a mortgage, but it's not impossible.
Here is how a bad credit mortgage can help you onto the property ladder, even if you have a poor financial track record.
Can you get a mortgage with bad credit?
Your credit report is one of the most important documents when applying for a mortgage.
It shows your track record of managing and repaying debts such as credit cards and your phone or energy bill.
Everyone is given a credit score based on how well they manage any debt repayments.
The rating is reduced if you fall into arrears or default on your loans or credit cards.
Any county court judgements (CCJs) or bankruptcies will also damage your rating and remain on your credit report for six years.
Having a low score and lots of unpaid bills means you are in bad credit.
A lender will do a credit check when you make a mortgage application and any bad marks or a low score can make it harder to get the best home loans.
You may be seen as a more risky borrower, so a lender could ask for larger deposit than on a traditional mortgage.
Bad credit mortgage rates may also be higher than usual.
What is a bad credit mortgage?
A bad credit mortgage is aimed at borrowers with a poor financial history.
Bad credit mortgage lenders are more likely to accept borrowers with a history of bad debts.
Lenders may offer deals specifically for those with arrears or county court judgements on their credit report.
Others may just consider bad credit as part of an application.
In some cases it may only be possible to access bad credit mortgage deals through a broker.
However you apply, the level of deposit is likely to be higher – at around 25% – and the interest rate will be more expensive than on a standard product.
How to get a mortgage with bad credit
A mortgage will most probably be your largest ever debt, so you want to ensure you are getting the best deal.
Take time to sort your finances so you can be in the strongest financial position possible.
That may mean paying off debts and taking time to rebuild your credit score, even if it takes a few years.
Check your credit report for any mistakes that may be pushing your rating down.
It is also worth saving for a large deposit, as this will help keep the rate lower even if you have bad credit.
Some lenders may even let you get a guarantor mortgage, where a family member or friend agrees to cover the payments if you fall behind.
They may have to provide some of their savings or their home as a security.
It may be useful to speak with a mortgage broker, as some may specialise in bad credit mortgages and can help with an application.
Some lenders and comparison websites may have a bad credit mortgage calculator that shows you how much you could borrow and how much a loan could cost.
This can help you decide if it is worth applying.
How do bad credit mortgages work?
Mortgages for people with bad credit work in the same way as standard home loans.
The main differences are that it will be harder to get the best mortgage rates and you may be asked to put down a large deposit, rather than the 5% or 10% that a first-time buyer can usually pay.
The level of deposit and rate, as well as your chances of getting accepted, will depend on the type of bad debt and how long it has been on your credit report for.
Bad debts, CCJs and bankruptcies stay on your credit file for six years.
It may be easier to get approved for a mortgage nearer the end of that period, once the bad marks are older and you have made efforts to rebuild your score.
Should I apply for a mortgage with bad credit?
You are likely to have a mortgage for many years, so it is best to try to keep costs down.
Stepping onto the property ladder with mortgages for bad credit can leave you with high monthly repayments for years.
If you can wait, it may be worth rebuilding your credit score first so you can access the best rates to reduce your monthly repayments and pay a lower deposit.
What are the advantages of a bad credit mortgage?
Not everyone wants to wait to get on the property ladder and you may need to buy somewhere due to a job, or if you just want your own space.
Getting a bad credit mortgage now means you can get on the property ladder quicker, plus you start owning an asset that will hopefully rise in price over the coming years.
In contrast, waiting too long could mean you miss out on lower house prices.
Additionally, your credit score will improve as you start repaying any type of mortgage – so you could remortgage to a better rate once your deal ends.
What are the disadvantages of bad credit mortgages?
Rushing into a purchase with a bad credit mortgage will mean you have to pay a larger deposit.
This may have been money that you could have used elsewhere, such as for holidays or general living costs.
You will also have less choice of mortgages and higher interest rates.
What is a bad credit score?
A bad credit score is a low rating on your credit report.
The score can be pushed down if you have missed bill payments, received CCJs or been made bankrupt.
It can make it harder to get approved for credit such as mortgages or loans, as you will be seen as unreliable by a lender.
Bad scores differ depending on the credit rating agency, but if you have a poor score for one then you are likely to have the same for the others.
What’s the lowest credit score for a mortgage?
There is no minimum credit score to get a mortgage.
This is because all ratings agencies will score people differently.
Bad credit scores are different depending on which credit rating agency (CRA) a bank is using for your application.
Lenders will also all have their own lending criteria and affordability assessment, so your score will form part of the application.
Your best bet is to rebuild your score so it is as high as possible before making an application.
What is a typical mortgage rate for bad credit?
Rates can change all the time and will depend on the lender and the economic environment.
Pricing will be higher than on a standard mortgage to reflect the added risk a lender is taking by giving a loan to a borrower with a poor financial track record.
Typical bad credit mortgage rates were at around 4% at the start of May 2021 based on a 25% deposit.
In contrast, the average rate for a standard two-year fix with a 25% deposit in March 2021 was 1.56%, according to the Bank of England.
What mortgage lenders will work with bad credit?
It can be tricky to get a bad credit mortgage from mainstream high street lenders.
Often, building societies and challenger banks offer the best deals for a bad credit mortgage as they may have more flexible criteria.
Some deals may only be offered through mortgage brokers, so it may be worth using an adviser to help make your application and find the most suitable offers.
Alternatively, a comparison website can help search for bad credit mortgages – but you would have to do the application yourself.
Remember, successive rejections can also harm your credit rating. So it is only worth applying if you know you have a good chance of being accepted.
Can I remortgage with bad credit?
Remortgaging can be tricky if you have fallen into bad credit since starting your mortgage.
Switching to a new lender may be harder, as they will conduct a credit check and you may fail their affordability assessment if you have bad marks on your report.
It may be easier to move products with your existing lender, as there may not be a new credit check if the balance is the same and you are moving to a similar deal.
Additionally, they will already have evidence of you repaying your current mortgage each month; so may be more likely to accept you for a new deal.
Can I get a mortgage if I’ve been made bankrupt?
Having a bankruptcy on your credit report can be a big red flag for lenders, as it drastically reduces your credit rating and makes you appear as a risky borrower.
A bankruptcy stays on your credit file for six years.
Some lenders may still approve mortgages for someone who has been made bankrupt, but it may be harder in the first few years and you would need to try to improve your rating in other areas.
Rates will still be higher, and you will need a big deposit to reassure a lender if you have been made bankrupt.
Alternatively, it may be better to wait for the six years to pass and to build up your score in the meantime so you can access better rates in the future.
Can I get a mortgage if my house was repossessed?
Similar to a bankruptcy, falling behind on your mortgage payments and having your home repossessed will harm your credit rating.
This can make it harder to get a mortgage and you may need to use a mortgage broker who specialises in bad credit mortgages, so they can find a lender most likely to accept you.
Improving your score, by taking steps such as repaying old debts, will also boost your chances of getting a mortgage approved.
How can I improve my credit score?
Improving your credit score can take time, but there are a few easy steps you can take.
Make sure you are on the electoral roll.
This proves who you are and where you are living.
Check for any errors that are pushing your score down and avoid applying for too much credit at once, as this can reduce your score – especially if you are rejected.
Clearing any debts will also boost your score and making sure you pay existing bills on time will gradually move your rating up.
How do I check my credit score?
CRAs hold data on the financial accounts you have and how good you are at paying your bills.
It is worth checking different CRAs as they may access the data differently, so there could be errors that push your rating down on one but not the others.
Each of them offers a credit report service, although they differ slightly in the functionality provided and in the cost of access to reports.
All will send alerts when your rating changes so you can check your report is correct.
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