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Bad credit mortgages

Learn about bad credit mortgages and how to find the best bad credit mortgage rates for you in our guide below

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What is bad credit? 

Bad credit is a blanket term used to describe a wide variety of personal finance issues that are recorded on your credit file. They could range from having a single late payment, right through to bankruptcy. All of the following circumstances would fall under the umbrella of having bad credit and are loosely in order of severity:

  • No credit score due to never having used credit

  • Missed or late payments

  • Defaulted payments

  • County Court Judgement (CCJ)

  • Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA)

  • Mortgage arrears

  • Bankruptcy and repossession

If you have bad credit, getting a mortgage can be more difficult. However, there is a specific niche of lenders that are set up purely to help customers with bad credit to buy a house.

They are often referred to as bad credit lenders or subprime lenders and are usually more flexible than mainstream lenders with the types and severity of bad credit that they are willing to consider.

What minimum credit score do I need to get a mortgage? 

Usually when you have bad credit, you will have a low score on your credit report. However, each of the three major credit referencing agencies, Experian, Equifax and TransUnion, use a different scoring system. This means that what sounds like a very low score with one agency, may not be so bad with another, or vice versa. 

When it comes to your mortgage application, the vast majority of lenders will use your credit score to help them decide whether to lend to you or not. However, each lender has their own idea of what constitutes bad credit and the minimum score they are willing to accept. 

There is no minimum credit score threshold that applies universally across the mortgage industry and the minimum credit score acceptable by each lender will depend on their individual criteria, and which credit referencing agency they use. In fact, some bad credit mortgage lenders ignore the score entirely and base their decision on a broader credit picture. 

The good news is, this means that being rejected by one provider does not necessarily mean that you would be by all. A broker who specialises in bad credit mortgages should be able to help you find a lender to suit your needs.

How would a mortgage with bad credit work? 

Mortgage lenders who are more open to applicants with lower credit scores may refer to their products as 'bad credit mortgages'. However, this is simply to show that they are available to borrowers in these circumstances, the actual mortgage works exactly the same as any other.

The main difference you will likely notice is that mortgage interest rates for bad credit mortgages are usually higher. You may also have to pay higher fees. Lenders determine the rate of interest you'll pay on the risk involved, and a poor credit history suggests that you pose a higher risk of missing repayments.

Be sure to consider the total cost when you compare bad credit mortgages and this will help you to determine whether buying a house with bad credit is the best option for you, or whether you would benefit from waiting until your credit file is in a better condition.

Can I buy a house with bad credit?

You can get a mortgage if you have a low credit score or even bad credit, but it will be more difficult than if you had a clear credit history. There are fewer high street lenders willing to approve bad credit applications, however, you should be able to find a specialist bad credit (or subprime) lender to help you.

There are a number of risk factors that lenders will look at when assessing a mortgage application, so your best chance is to ensure that the rest of your circumstances match lender criteria well, such as affordability and property type. It will also help if you can offer a larger than minimum deposit, or more equity, in the case of a remortgage. 

Applying for a mortgage agreement in principle, prior to your full application, will help you to gauge the likelihood of being accepted, without having to damage your credit file further with hard searches. Typically only soft searches are carried out at this stage, but if you’re concerned, check with your broker or the lender before the searches are done. They will be able to confirm whether a soft or hard search will be carried out.

How to increase your chances of buying a house with bad credit

There are a number of things that you could do prior to making a mortgage application that may help increase your chances of being accepted. If you buying a house with bad credit, then the key to your success is preparation. Make sure to address the below suggestions to maximise your mortgability:

Use an experienced broker

Whole-of-market mortgage brokers like our partners at Mojo Mortgages have access to every bad credit lender on the market, including some that may not be accessible to the general public.

Using a broker can increase the number of lenders available, meaning there is more chance of finding a lender with criteria that matches your circumstances.

Brokers can also steer you away from applications that would be likely to fail - which can prevent further damage to your credit file. They can also often use their relationships with lenders to convince them to accept borderline applications.

Increase your deposit

Offering a bigger deposit will give you access to better rates, whatever your circumstances. It gives lenders more confidence in your commitment to the loan, so they see you as a less risky option.

This is even more important if you have bad credit as it can go a long way to repairing any concerns the lender has about your ability to repay the mortgage. 

It’s unlikely you will get a 95% mortgage, as typically at least 15% deposit is needed to buy a house with bad credit. Offering more than 15% will increase your chances of finding a suitable mortgage.

Check your credit file

It’s important to go into your mortgage application with a good understanding of your finances, so make sure you obtain a copy of your credit file from TransUnion, Equifax and Experian to see what information is held about you.

Your credit file can also contain incorrect information, and even the smallest mistakes can impact your score. Check that all names, addresses, and particularly information about past credit issues, are correct. You can approach the credit reference agencies to amend mistakes if you find any. This can take a few weeks, so it’s best to do this early in your planning stages.

Improve your credit score

Your credit file shows your management of past and present debts, including how much you owe, how much you've paid back and whether you've missed any repayments. The score builds slowly over time and any negative occurrences, such as a CCJ, stays on your file for six years. 

There are a few quick ways to improve your score:

  • If you have any credit issues, try to your best to resolve them as some lenders will prefer a default or CCJ to be satisfied (paid off)

  • Make sure you are on the electoral roll at your current address and check your whole file for mistakes

  • If you have a low score because you've never used any form of credit, lenders will see this as less severe than bad credit. However, credit builder credit cards are available specifically to increase your score in these circumstances

  • Companies like CreditLadder, who record your rental payments on your credit file on your behalf can help to develop a picture of financial responsibility if you rent while saving a deposit

Organise your finances

Even if you have a history of bad credit, a positive change in behaviour will go some way towards making lenders more confident that you are a responsible borrower. It’s therefore a good idea to pay particular attention to the following goals in the six months prior to your application:

  • Paying bills, loan repayments, credit cards and other debts, on time

  • Reducing any outstanding debts as much as possible (less than 50% of the total amount of credit available to you is the goal)

  • Saving as a deposit as large as possible

  • Not taking out any additional credit in the run up to your application

  • Show that you've made an effort to increase your income, whether that's through promotion, a second job or buying jointly with a partner

Use a guarantor mortgage or other financial help from family

Guarantor mortgages can be helpful if your credit score is preventing you from getting a mortgage, or unable to meet mortgage affordability criteria due to a low income. 

Most people use relatives as a guarantor, but some lenders will accept friends or colleagues. Having a guarantor does not always mean your application will be accepted, but it should improve your chances. Keep in mind that the guarantor's home could be at risk if your mortgage falls into arrears.

Most lenders will accept a 'gifted deposit' from a family member, which can help those struggling to save one. This can't be a loan and you must be under no obligation to repay the money.

It’s also become more common for people to buy jointly with family. This can increase affordability, but is also beneficial if those you are buying with have better financial circumstances than yours. Some lenders allow you to include up to four borrowers on one mortgage - maybe something to consider if you have a close group of siblings. 

How to apply for a mortgage with bad credit

If you have a bad credit record, your mortgage options are likely to be more limited and less competitive than those available to people with better credit scores.

Mortgage lenders conduct credit checks on all potential borrowers, so there’s no point in trying to hide your credit problems. In fact, being dishonest about your credit history is more likely to reduce your chance of being accepted! 

Some lenders are more sympathetic to certain reasons behind bad credit than others. For example, being in debt because your partner passed away and you've struggled to live on a single income will be seen in a better light than being in debt due to irresponsible spending habits.

The severity of your credit issues will dictate whether or not you are able to get a mortgage approved now, or have to try again when you're in better financial circumstances.

If you’ve got a history of defaults or CCJs, mainstream lenders may begin to consider your application around six to 12 months after they have been resolved. With more severe issues, such as bankruptcy, most lenders will want it to have been discharged for a number of years before you're accepted.

Subprime lenders are usually more open to those applicants on the severe end of the bad credit spectrum, but bankruptcy and repossession are both scenarios where you may struggle to secure a mortgage, even with bad credit lender.

A mortgage broker will be able to help you work out how likely you are to be able to buy a house with the level of bad credit that you have now, or whether you would need to wait for your credit status to improve.

Advantages of getting a mortgage with bad credit

  • You can buy a home now, rather than waiting

  • You can lock in today’s prices, both in terms of property cost and interest rates, which may go up in the future

Disadvantages of getting a mortgage with bad credit

  • Higher interest rates

  • A larger deposit is needed

  • You might be offered a lower LTV (loan to value) on your borrowing

  • You will have less choice of lenders

Claire Flynn - Senior Mortgages Editor at Uswitch
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Your credit history plays an important role in your chances of getting approved for a mortgage. You may need to pay higher rates if you have poor credit - speaking to an expert can help you find a deal that might be right for you”

Claire Flynn

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