How to get a Mortgage with Bad Credit
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How to get a Mortgage with Bad Credit
Most people will feel disheartened, frustrated and upset when a high street mortgage broker informs them that their application has been declined, and we don’t blame you. Getting a mortgage can be complex and stressful, especially so if you have had financial issues in the past, or conversely very little credit history at all. Lenders can appear overly cautious about any mortgage application from anyone without a conventional credit history, not least because they often work to a system and don’t take time to understand clients or their circumstances individually to find out whether they can afford a mortgage or not.
However, other lenders have moved to fill this need in the market, offering ‘bad credit mortgages’ designed to serve people with a less than perfect credit history. The popularity of these products has risen steadily in recent years, as more people realise that having marks against them on their credit record does not necessarily mean they will be denied a mortgage. How do you start the process towards a mortgage that suits your needs? Here, we’ve gathered advice from our team of specialist advisers to help you on your journey to a successful mortgage application.
Information on How to get a Mortgage with Bad Credit
Why have I been declined for a mortgage?
A lender might find many reasons to decline your mortgage application. Anything out of the ordinary on your credit report – from too many credit accounts left open to inconsistencies in your addresses or a late payment – may be not to their liking and they’ll view you as a greater risk than a ‘conventional’ applicant. This can be very frustrating.
With the lender relying on your credit history for information, the first step you should take is to request copies yourself so you can see where any problems lie and make sure all data is accurate and up-to-date. If something is incorrect, you can take this opportunity to put the records straight and therefore strengthen your case to get the mortgage you are looking for.
There are numerous myths surrounding credit ratings or scores, and their impact on your mortgage applications. Let’s take a look at some of the most common falsehoods we hear in our line of work…
- Credit agencies can ‘blacklist’ addresses. False – your own credit history will not be affected by that of a previous resident.
- Payday loans can boost your credit rating. Absolutely not – in fact the opposite is true. Using payday loans tells lenders you are not great at managing your money.
- People with similar names can affect your credit report. This doesn’t happen, and will not affect your rating (unless someone is fraudulently using your name, in which case you should contact the police immediately).
- Checking your credit rating hurts your score. This is not the case if you are using a credit reference agency to see what information they hold on you. If you simply keep requesting credit that is refused, then this will harm your score.
- Earnings have a big effect on a credit report. Credit agencies do not use how much you earn as part of their rating systems. Paying bills or loans on time will help your credit score more than having a lot of money but always missing or delaying payments.
- Two people’s credit reports will merge when they get married. Getting joint accounts might affect your credit score, but your individual credit history is still yours after marriage.
- You need to wait six years for a better credit report. Not quite true. Certain penalty criteria – like CCJs, IVAs and default notices – on your credit report last six years. But you can still successfully apply for a mortgage before they disappear, given the right support.
If you need it, we’ll be happy to tell you how to check your credit report.
Checking your Credit History is correct
Checking your credit history’s accuracy can mean looking into quite a few things, which can be split into the following areas:
- Address history – ensure your previous addresses are correct and consistent
- Fraudulent activity – make sure everything there can be ascribed to your actions
- Balances – check the accuracy of all closed or outstanding balances and accounts
If you spot anything erroneous on your credit reports during this process, for example incorrect addresses or balances linked to prior credit accounts, make sure you contact the relevant credit reference agency directly – TransUnion, Equifax or Experian – to ask them to rectify it.
You should take care during this process not to trigger any ‘hard’ credit checks by other parties. This happens when you apply for any kind of credit agreement, mobile phone contract, store cards, etc., and it’s critical to avoid them as they could make a poor situation with your credit rating worse.
Close any credit accounts you do not use
Closing credit accounts that you no longer need or use demonstrates responsibility and a level of discipline to lenders that they like to see when running credit checks. It shows you are able to keep on top of your financial arrangements and are aware of what your credit needs are likely to be. It’s also widely known that having not borrowed before, and having little or no credit history, can be as equally damaging to your credit score as having credit issues.
Having lines of credit available and managing them well is a sure sign that you are capable of paying back loans, and therefore a mortgage, which will stand in your favour. However, having many sources of credit constantly open to you, even when not in use, may be a deterrent to some lenders.
Credit builder credit cards
Credit builder credit cards can be useful if you have either very little or no credit history, or a damaged credit history that needs repairing. However odd it may seem that to improve your credit score you need to take out more credit, the object of these cards is to help prove you can repay money that you have borrowed.
A credit builder card provider will usually be willing to accept your application, even if you have been turned down by other card companies, but the credit limit will typically be lower, so you will be able to borrow less, and their interest rate will be higher than standard cards, meaning you need to be careful with your credit and follow these tips:
- It’s essential that you pay off the balance each month, on time. Not only will this mean avoiding higher interest rates, but also show that you can be trusted to be responsible and make regular repayments. If you don’t, then the opposite will be assumed.
- Always stay within your credit limit. This shows that you can live within your means and take credit seriously.
- Avoid taking out cash on your credit card, as this can cost you more, and also (similar to payday loans) imply that you are unable to manage your money efficiently.
If your circumstances are such that you are declined by a credit builder card supplier, do not try to apply again. Each application triggers a credit search by the company, and multiple credit searches will harm your credit score.
Generally speaking, if you can use this kind of card to prove you can borrow and repay money responsibly for a few months, this will improve your credit score and therefore your chances of getting a mortgage. However, it’s best to avoid this route if you have any doubts that you will be able to keep up repayments.
Register on the Electoral Role
Being registered to vote provides a valuable way to verify your address and identity, and is very helpful in fraud scoring – all very important factors to credit agencies and lenders during their application process.
If you are not already registered to vote, we recommend you do so at the earliest opportunity, rather than waiting until the next election. You need your National Insurance Number to get started – follow the instructions here on the Government website.
If you are not able to register to vote, then one alternative is to prove your eligibility to live in the UK and send copies of documents to the three main UK credit reference agencies. This may cause further complications in the mortgage application process, so it is best to talk to one of our experienced advisers who can explain what this might mean for you.
Only spend within your means
We have already mentioned how important it is, in order to repair or build your credit score, that you pay off credit balances regularly and on time. This means being careful not to go beyond what you can afford in your spending and showing responsibility to all your financial commitments.
It is safe to assume your chances of a successful mortgage application will decrease if you are late with payments, or your credit score becomes worse whilst you are actually trying to apply for your mortgage.
How much can I borrow with Poor Credit?
It’s no secret that the more money you can pay upfront for a deposit, the better your chances will be of getting a mortgage with a competitive interest rate, or a higher loan-to-value (LTV) ratio (you will be able to borrow more). Saving more money might seem frustrating, especially if you have already been saving for some time or do not have the ability to do so currently, but having more cash available will help make your mortgage application more likely to succeed.
The LTV ratio is the percentage of the market value of the property in question that you will have to borrow. For example, if the property is worth £200,000, and you can provide a 15% deposit of £30,000, then the LTV ratio of the mortgage will be 85%.
Generally, if you have a lower LTV ratio, then you will be able to access a greater variety of mortgage options, at better interest rates. This is based on the level of risk you present to the lender – the more equity you have, the less money you need to borrow, the lower the LTV ratio, and the lower the risk.
It can still be possible to get a mortgage with a 5-10% deposit, and some lenders might even consider a 100% mortgage in certain circumstances, but in general, the larger the deposit you can pay upfront, especially if you have had financial difficulties in the past, the more likely you are to get a mortgage.
Bad Credit Mortgage Broker
In order to get the best mortgage deal possible, it’s important that you are matched with a lender and a product that suits your situation. This is difficult enough to do yourself in conventional circumstances, but is especially true if you have suffered financial issues that have affected your credit score. If you are looking to apply for a bad credit mortgage, you will need to talk to a specialist mortgage broker as you’ll need to deal with specialist lenders who you will probably not find on the high street.
A broker who specialises in bad credit mortgages has an in-depth knowledge of this market, and is in a far better position than a standard broker, or yourself, to not only find the best lender but also get access to exclusive interest rates or mortgage products that others cannot.
A good broker will also take much of the stress and strain of applying for the mortgage off your hands, speeding up the application in the process. They’ll walk you through the exact process they will follow, give you honest and open advice about your options, let you know who they are talking to and what they will need you to do or supply to further the application process.
We believe that everyone has the right to a mortgage, and work hard for our clients to help them secure the mortgage that best suits their needs, for the best possible deal.
If you have been turned down for a mortgage elsewhere, or believe that a bad credit history is affecting your chances of a mortgage, please do get in touch and we will do everything we can to turn your case around.