Bad Credit Mortgage

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Bad Credit Mortgage

Bad Credit Mortgage 

Lewis Shaw talks to us about how the mortgage process works if you have bad credit. 

How does having bad credit affect my ability to get a mortgage? What are my options?

Bad credit can span a multitude of things, all the way from missing one payment on a mobile phone bill up to bankruptcy and repossession. How it can affect your ability to get a mortgage depends upon the type of bad credit you have, and when it was registered but also importantly when it was repaid or satisfied to use the jargon.

It’s important to be upfront with your mortgage broker, so they know from the start what they’re dealing with. Generally, it may mean you need a slightly higher deposit, depending on the type of bad credit and mortgage interest rates may not be quite as competitive in comparison to people with good credit.

But if you have had bad credit in the past, it’s not going to be there for the rest of your life. You could buy a home using a more specialist lender for your situation, but it’s not going to affect you for the next 25 years. It’s just a stepping stone. Once that bad credit has fallen off your credit profile and your credit has improved, we can look at getting a better deal in the future.

Are there specific lenders who specialise in mortgages with bad credit?

Yes, there are absolutely specific lenders who specialise in bad credit mortgages. As brokers, we call them specialist, niche or adverse lenders.

Their entire lending proposition is to help people who’ve had credit issues in the past or are currently having credit issues. The right thing to do is pick up the phone to a broker and establish what your options are.

What is considered a bad credit in the UK? What types of bad credit are there?

Broadly speaking, there are two types of bad credit – arrears and court-mandated bad credit. If someone got into arrears on their credit card because they couldn’t make the payments, that would show up as a late payments on their credit report.

That’s one element of bad credit. It’s usually relatively easy to overcome and is at the lower end of what we consider bad credit. However, certain things on your credit profile may involve a court, such as County Court judgments (CCJs).

There are also IVAs, which stands for individual voluntary agreements. There are defaults, where a credit institution has registered a default against you for missing a certain number of payments. There are debt management plans, where you’ve entered into an agreement with a creditor or multiple creditors to repay your debt over a period of time.

There’s also of course bankruptcy and also repossession, where you’ve had your home taken away due to being unable to meet your mortgage payments. So there’s a big spectrum

of bad credit ranging from ‘light adverse’ credit up to serious bad credit like IVAs, bankruptcies and repossession.

Can I still get a mortgage if I’ve had previous bankruptcy or foreclosure?

Yes, you can still get a mortgage if you’ve had a previous bankruptcy, but the type of mortgage and deposit you will need will vary depending on how long ago that bankruptcy was satisfied.

For example, if you’ve been discharged from bankruptcy for a year, there’ll be only a handful of lenders. If you’ve been discharged for five years there’ll be many more. A bankruptcy that’s been discharged for more than six years will no longer be on your credit profile; however, even at that point, some lenders still may not lend to you. But broadly speaking, as long as the rest of your credit history is okay you should be fine.

What if I have been declined for a mortgage with bad credit previously?

Being declined for a mortgage with bad credit previously doesn’t prevent you from looking for other options. We regularly see people who applied for a mortgage on the high street and have been declined. They’ve been told to seek independent advice from a specialist mortgage broker.

Nothing prevents you from applying again. It’s normal and very common. It’s not something to be embarrassed about. Pick up the phone, be totally honest with your broker so we know what we’re dealing with and we can put a plan in place.

It’s almost never an absolute no. It may be a ‘not right now’, but there are things you can do and steps to take so that even if you can’t get a mortgage right now, you can make a plan for the future.

If I’m a First Time Buyer and have bad credit, will it affect me getting a mortgage?

It may affect you getting a mortgage, but again, it’s determined by the type of bad credit, how much money was involved and when it was.

If it was £10 on a mobile phone, six years ago, it’s not really going to make a difference. A £20,000 CCJ last week, though, that would have a big impact.

That spectrum of bad credit influences which lenders will approve you and also how much deposit you will require. You can still get a mortgage as a First Time Buyer with bad credit, but it’s important to seek out advice early in the process. You’ll then know exactly what it’s going to cost you, what your property budget will be and how much deposit you’re going to need to save. 

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Do I need a larger deposit for a mortgage with bad credit?

Again, I have to say it depends. The bigger the deposit, the better it will be for you altogether, but depending on the type of bad credit, the timing, how much it was for and when it was paid off will determine what deposit levels you’ll be eligible for.

There are specialist lenders where you will still only need a 5% or 10% deposit. There aren’t as many of those, as you can imagine. If you’ve got quite severe and recent bad credit, the deposit requirements can be significantly higher – in some cases up to 15%, 20% and in extreme cases, 25%.

Again, seek advice because a good broker can tell you straight away what deposit you will need and you can then put a plan together.

What is the minimum credit score required for a mortgage with bad credit?

There’s no minimum credit score requirement for a mortgage with bad credit. When you’re applying for a mortgage, and you have bad credit, it comes down to whether you fit the mortgage provider’s lending policy rather than your credit score.

Credit scores are important, but not as much as people think. It’s often the cause of worry, confusion, and fear for people who have had bad credit in the past because of things you see online or on social media.

But don’t let that put you off. Many bad credit mortgage lenders don’t actually credit score. They look at your credit history and what’s happened. They want to see if there is an explanation for it. Is it getting better? It may be a case of whether your situation makes sense to the lender and if they are comfortable with the case.

So don’t worry about minimum credit scores. Just speak to a broker and we will direct you accordingly.

Can you remortgage with bad credit?

Yes, remortgaging with bad credit is possible. It can sometimes be a bit easier, because often there’s equity in the property, which means your Loan to Value is better. The remortgage process is broadly the same as if you didn’t have bad credit. But it’s always important to make sure your broker understands the credit issue, so they can take account of it and make an appropriate recommendation based on what you’re looking to do.

Can I get a Buy to Let mortgage with bad credit?

Getting a Buy to Let mortgage with bad credit can be a little bit trickier, but it’s still possible. Those specialist lenders we mentioned don’t operate solely in the residential space. They also accept bad credit Buy to Let mortgage applications.

Depending on where you are in the bad credit spectrum, the deposit requirement could be a touch higher and mortgage interest rates may not be quite as competitive as they otherwise would have been. But yes, you can still get a Buy to Let mortgage with bad credit.

Can you consolidate debt twice?

Debt consolidation is classed as high-risk mortgage lending. The Financial Conduct Authority has specific rules in place for debt consolidation. It has to be appropriate.

Some lenders will allow you to consolidate debt twice, but there has to be a serious conversation about how you’ve ended up in this position and how to avoid getting into that situation again.

Many lenders will let you consolidate once, but some will decline a second application. You’ve got to understand that with debt consolidation if you’re paying off unsecured debt by putting it on a mortgage, you’re reducing your equity.

Whilst that may free up some disposable income on a month-to-month basis, if you’re remortgaging to pay off debt, you’ll likely pay more interest during the term of that mortgage rather than paying off the debt normally because you’re stretching out that debt over a longer duration so it’s really important to consider the implications of debt consolidation before doing anything.

Can I use a guarantor for a mortgage with bad credit?

Yes, you can still use a guarantor if you’ve got bad credit and you’re wanting to get a mortgage. Not as many providers offer this, but it’s possible. However, if one person has bad credit and the other has fantastic credit, the good credit doesn’t balance out the bad

You can get a mortgage with bad credit using a guarantor, but that guarantor doesn’t offset your bad credit situation.

How long do I have to wait after improving my credit score before applying for a mortgage with bad credit?

If you want to improve your credit score before applying for a mortgage, ensure that bad credit has been satisfied or repaid. Clear any arrears, pay any CCJs off, and settle any defaults. Now that may not always be possible but in an ideal world that’s going to have the most positive impact on your chances of getting a mortgage.

Once you repay those bad debts, your credit score should start to improve. As I mentioned, the score is no barrier to you getting a mortgage because many lenders don’t credit score – they credit search and look at your credit conduct.

While your credit score will improve, it’s not a quick fix and can take many months or years, depending on the type and level of bad credit. Pay debts off as soon as possible, and hopefully things will begin to improve.

How can a mortgage broker help with a bad credit mortgage?

A mortgage broker can help in a multitude of ways. We have access to specialist lenders that you won’t find on the high street and, in many cases, only operate and lend via brokers, which means you may not be able to apply to them directly.

Then it’s about establishing a plan to get the mortgage, including how to remortgage away from that lender in the future once your credit history has improved. You may have bad credit now, but credit profiles only run for six years. After that time, the bad credit should be less of an issue and will eventually fall off your profile.

In a year or two, we can likely find you a more competitive mortgage with a more mainstream lender. It’s just about being open and upfront with your broker so they can understand your circumstances.

We do a lot of bad credit mortgages and are used to dealing with those particular lenders. We understand how they work, who they will accept, the criteria, how much you can borrow, and what deposit levels you’ll need. As a buyer, it’s sensible to work with a broker that understands that market.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.