7th June 2021
Is Bad Credit Standing In Your Way?
If you’d like to buy a new home, but you’re worried your credit score will make it feel like an impossible dream, that’s not necessarily the case. Just because you’ve had problems with poor credit in the past, it doesn’t mean you won’t be able to buy a home – bad credit mortgages help people with bad credit do just that.
An increasing number of lenders process affordability assessments and applications manually to determine if they can override a credit score and give you the helping hand you need – even if you have historically bad credit or have been refused elsewhere.
What’s the difference between regular mortgages and bad credit mortgages?
When it comes to the cost of a bad credit mortgage, you have to be ready for two main differences. Compared to someone with an exemplary credit record, you’ll likely be able to borrow less, and the loan will probably cost you more.
Mortgage offers are based on a loan-to-value (LTV) ratio. People with good credit could typically expect to enjoy a 90% LTV, which means they’ll be able to borrow 90% of the cost of the property, and will be expected to put down a 10% deposit to cover the balance.
It’s not impossible to achieve a 90% LTV mortgage with bad credit, but it’s less likely. It’s also easier to get a ‘yes’ if you aim to borrow less. The bigger the deposit you are able to put down, the more the risk to the lender is reduced and the more likely they are to make a mortgage offer. An added benefit is that the interest rate may also be lower than if you were to borrow more, to reflect the reduction in the perceived risk.
What are the most common causes of bad credit?
When you apply for credit, lenders aim to verify two things: that you are who you say you are and that you have a proven history of paying your bills on time. If you have a poor credit score, then that suggests to lenders that you can’t manage your money, which in turn means they view you as a high-risk applicant.
Probably the most common causes of bad credit are missed or late payments. That can escalate to a default, which is a series of missed payments and, if matters aren’t rectified and the case goes to court, a County Court Judgment (CCJ) may be levied against you.
If you have been in financial difficulty and entered into a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA), that will count against you, especially if it is still active. The same is true if you have been declared bankrupt.
Different things carry different weight. For example, missed mobile phone contract payments have less impact than missed mortgage payments.
If you have rarely or never had credit before, and so have no way of showing good financial management, that can also count against you.
How do you know if you have bad credit?
There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion (previously Callcredit). Your credit rating is derived from information gathered from lending companies and also the public record.
Public records provide details about things like CCJs, bankruptcies and IVAs, plus information held on the electoral roll. The credit reference agencies collate that data and combine it to create a credit profile, and to generate a credit score.
Lending companies use that data to decide whether to lend money to you. Depending on your score, they’ll say yes or no, or perhaps say yes, but with conditions attached. That generally means you get your money, but perhaps not as much as you asked for, and at a higher rate of interest.
Any adverse credit events are removed from your record after six years and the further in the past they happened, the less impact they will have now.
If you want to check your credit score, you can request a copy of your credit file from each of the three agencies. They each collect different data, so you need to check all three.
What can you do to improve your credit score/position?
There are a number of ways in which you might be able to improve your credit score, meaning that you may be able to get a better rate on a mortgage. However, it’s important to remember that this is a continuous process and you’re unlikely to see fast results.
- First, get a copy of your credit report from each of the UK’s three credit reference agencies and check that the details they hold are accurate. Ask for any errors to be corrected.
- If something outside your control happened that was the underlying cause of things like missed payments – say you were self-employed and had an accident, or your employer went bust and left you in the lurch – pass on the details to the credit reference agencies. It won’t remove the details from the record, but they can add a note explaining what happened, which might help with future applications for credit.
- Avoid running up additional debt, and especially avoid payday loans – they’re seen as a sign that you can’t properly manage your finances. It’s also important to pay your bills on time and make sure you aren’t paying more than you need to for anything, or for anything you aren’t using (like that gym membership!).
- Finally, make sure you’re registered on the electoral roll.
How to apply for a bad credit mortgage
If you think that you have bad credit and feel daunted by the process, the good news is we can help.
A mortgage adviser will have access to contacts and deals that aren’t available to the general public. They’ll be able to conduct a ‘soft’ credit check in the first instance, so your enquiry doesn’t adversely impact your credit score. They’ll often also save you time, stress, heartache – and money.
If you’d like more information about bad credit mortgages, click here, or alternatively call us on 08454 500200. With business partners in Winchester, Southampton, Farnham, Bishops Waltham, Alton, Chandlers Ford, Alresford, Romsey, and Park Gate, you are never too far from financial advice.
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