Under almost any circumstance, you need a credit check in order to get a mortgage, but if you are worried about bad credit, there are ways to improve your chances of being approved.
Your credit history is a significant deciding factor when trying to borrow money, because it shows lenders, including mortgage providers, how reliable you have been with other credit products. If you have bad credit, it is quite likely your mortgage application will be rejected.
However, there are ways to improve your credit rating and there are also mortgages that are better suited to those who have a less than perfect score.
Since the 2008 financial crash, there have been several new regulations and restrictions placed on the financial sector, including how mortgage applications are approved.
This means more stringent checks are now required, so getting approved for a mortgage has become more difficult.
There are three key areas that need to be accounted for in a mortgage application: your deposit, affordability criteria and a credit check. If you get these three parts to come together positively, you should have a better chance of being approved for a mortgage. Here we look at each in a little more detail.
The size of your mortgage deposit is a major determining factor when lenders decide how much to give you.
If you are buying a home valued at £250,000 and you have a deposit of £50,000, you would be looking for a mortgage of £200,000, giving you a loan-to-value ratio (LTV) of 80%.
The higher the LTV percentage, the more risk there is for the lender, and therefore the less chance you have of being approved. If you can increase your deposit to reduce the LTV, you have a better chance of being accepted.
For example, on the same £250,000 home, if you manage to save a deposit of £100,000, your mortgage would only need to be £150,000, making your LTV 60%.
Increasing your deposit can significantly improve your chances of being approved for a mortgage, even if you have bad credit.
One of the main changes to mortgage rules since the late 2000s has been the introduction of stricter affordability criteria checks. Now mortgage providers are required not only to take a look at your recent payslips, but also check how your day-to-day lifestyle and average spending will impact your ability to keep up with your monthly mortgage repayments over a period of around 20 years.
In order to do this, they also stress-test your finances against potential real-life situations. For example, if the Bank of England were to raise interest rates significantly, would you be able to afford the extra costs?
They also check whether your finances could cope with a sudden change of circumstances, such as a death in the family or losing your job.
In order to pass the affordability checks without a problem, it is worth getting your finances and budget in order well in advance of applying for a mortgage.
That means cancelling any subscriptions you no longer use and creating a budget so you know exactly how much you should be spending every month – and sticking to it.
Your credit report shows lenders your history with financial products such as loans, credit cards, overdrafts and even utility and mobile phone bills. If you regularly pay your debts on time, and you don’t have a large amount of outstanding debt, you should have a very good credit score.
No matter what your credit history, mortgage providers carry out a credit check. Even if there is just one missed payment or county court judgement (CCJ), for example, this could make it more difficult for you to get a mortgage.
However, there are steps you can take to improve your credit score before a mortgage credit check takes place, which we outline below.
Your credit report could be a deciding factor in your mortgage application, so be sure to check it and improve it if necessary before applying.
Mortgage applications need a credit check because they are extremely useful in determining how risky it is to lend to someone.
Because the borrower is asking for such a large sum of money, to be repaid over a long period, providers need to carry out credit checks. If you have missed payments in your credit history, a mortgage lender may turn you down, because it doesn’t want the same thing to happen again.
Your credit score is a number based on positive and negative factors in your credit history. If, for example, you are registered to vote at your address, that counts as a positive mark and your score goes up. On the other hand, if you missed a payment on a credit card, that’s a negative mark and your score goes down.
There are three main credit reporting agencies in the UK. Each one gives a different score but they are all comparable and their methods are fairly similar.
The main outcome of a credit report is to reveal how reliable you are when it comes to borrowing money and paying it back.
There are a few easy ways to improve your credit score immediately, and some that take a little longer:
Make sure you are on the electoral roll at your address (this is easy to do and immediately improves your score – not doing so almost always gets you rejected for credit)
Pay off all outstanding debts
Close down credit cards you are no longer using (the more credit at your disposal, the higher the risk you are deemed to pose)
Take out a credit card for bad credit – one with a higher annual percentage rate (APR) and lower spending limit – use it sparingly and pay it back in full and on time to prove you can handle debt
If you are denied consumer credit, this leaves a footprint on your credit file. Too many failed credit applications can then have a negative effect on your mortgage eligibility, because lenders can see you’ve been denied credit.
Having a poor credit score is not the only reason you may be denied credit. Studies examining financial inclusion in the UK have found that people from minority backgrounds are more likely to be denied credit than those who identify as being white British. Thankfully, more leading banks and building societies are becoming aware of issues of financial inclusion, and measures are being put in place to ensure the financial workforce represents people from a wide range of backgrounds.
If you are having trouble accessing credit, try to leave sufficient time between credit applications and work on building up your credit score.
There are still ways to get a mortgage even with a poor or limited credit history. Some mortgage providers have experience with this and are more willing to receive applications from customers who don’t have a perfect credit rating.
Comparing the market is key and looking at specialist mortgage providers could yield better results.
Speaking to your current account provider may give you more options, too. If your bank provides mortgages and you have been a loyal, reliable customer for a while, it might be open to lending to you even if you have a poor credit history.
Many of the mortgages on the market targeted at those with a less than perfect or limited credit history come with some obvious drawbacks: a higher rate of interest and a lower mortgage amount.
If you are fortunate enough to find a mortgage provider willing to lend to you, be prepared to have to put up a larger deposit and pay a higher amount for your monthly mortgage repayments.
Another option is a guarantor mortgage. Guarantor mortgages allow a close friend or relative with a very good credit rating and ideally a property of their own to guarantee the mortgage for you. They take all the risk and responsibility if you can’t afford to keep up with repayments.
This means that their property could be at risk, too. If you can’t afford to keep up payments, your home and their home could be repossessed. Normally, guarantor mortgages are taken out by parents trying to help their children get on the property ladder, so such lenders are accustomed to those with a limited credit history, rather than a negative credit history.
A limited credit history is simply one where the borrower has not yet had a credit card or any debt in their life and therefore has a low score. A negative or bad credit history would apply to someone who has had debt and dealt with it badly by missing payments or going bankrupt.