It is reasonable to say that under almost any circumstance, you will 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, as it shows lenders and mortgage providers how reliable you have been with other credit products. If you have bad credit, then it is quite likely your mortgage application will be rejected.
However, there are ways to improve your credit rating and certain kinds of mortgages and providers 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.
As a result there are extra, more stringent checks required, which has meant that getting approved for a mortgage has become more difficult.
There are three key areas that need to be accounted for in a mortgage application: the deposit, affordability criteria and credit check. If you get these three parts to come together positively, then you should have a better chance of being approved for a mortgage.
Your mortgage deposit, mainly the size of it, will be a major determining factor of the amount the lender is willing to give you.
If you are buying a home valued at £250,000 and you have a deposit of £50,000, then 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, and therefore the less chance you have of being approved. If you can increase your deposit to reduce the LTV, then you have a better chance.
For example, on the same £250,000 home, if you manage to get a deposit of £100,000, then your mortgage would need to be £150,000, making your LTV 60%.
Getting to around this mark can significantly improve your chances of getting approved for a mortgage even if you think you have bad credit.
One of the main changes to mortgages since the late 2000s has been the advent of affordability criteria checks. Now mortgage providers are required to not only take a look at your recent payslips, but to see how your day to day lifestyle and average spending will impact your ability to keep up with your monthly mortgage repayments over 20 years.
In order to do this, they will also 'stress test' your finances against potential real life situations. For example, if the Bank of England were to raise interest rates significantly, could your current financial situation cope with that?
They will also see if your finances could cope with a sudden change of circumstances like a death in the family or losing your job.
In order to pass through the affordabilty checks without a problem, it is worth getting your finances and budget in order 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 at the end of every month – and ultimately 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, then you should have a very good credit score.
Unfortunately for those with negative credit marks, mortgage providers will carry out a credit check. Even if there is one missed payment or CCJ, you could struggle to get a mortgage.
However, there are some steps you can take to improve your credit score, which we will outline below.
Your credit report could be a deciding factor in your mortgage application so do make sure to check it and make an effort to improve it before applying.
Mortgage applications need a credit check because they are extremely useful in determining how risky it is to lend to someone.
Mortgage applications, perhaps more than other financial products, need to have credit checks because the borrower is asking for so much money, and over a 20-year period.
If you have missed payments in your credit history, the mortgage lender is likely to turn you down because they do not want to risk the same thing happening to them.
Your credit score is a number added up based on positive and negative factors in your credit history. If for example you are registered to vote at your address, then that's a positive mark, and your score goes up. On the other hand, if you missed a payment on your credit card, then that's a negative mark and your score goes down.
There are three main credit reporting agencies in the UK and each one will give a different score, but they will all be comparable and their methods for reaching that figure 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 will 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 will almost always get 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 more of a risk you are deemed to pose)
Take out a 'bad credit' credit card with a higher APR and lower spending limit, and use it sparingly and pay it back in full and on time to prove you can handle debt
Unfortunately, not all credit applications are made equal. Being denied consumer credit will not directly affect your credit score, but it will leave a footprint on your credit file. Too many failed credit applications can then have an effect on your mortgage eligibility as lenders will be able to see you've been denied credit.
Studies examining financial inclusion in the UK have found that people from BAME backgrounds are more likely to be denied credit than their White British counterparts. This could be contributing to the deepening ethnic and racial divide in levels of home ownership in England.
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 different backgrounds. This could hopefully lead to a reduction in unconscious biases and more financial equality across ethnicities.
In the meantime, if you are having trouble accessing credit, try to leave sufficient time between credit applications and work on building up your credit score and savings pot.
There are still ways to get a mortgage even with a poor or limited credit history. Some mortgage providers have experience with this and will be more willing to receive applications from customers who don't have a perfect credit rating.
Comparing the market is key and looking at mortgage providers that are not the usual high street brands could yield better results.
However, 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 with them for a while, they might be more 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, then be prepared to have to put up a larger deposit in advance, and to pay a higher amount on your monthly mortgage repayments.
Another option available to those with a limited credit history is guarantor mortgages. There are not many providers who offer guarantor mortgages, never mind to those with a bad credit rating, but they can be a helpful way of getting around the issue.
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 will 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 lenders will be 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 will have a low score. Whereas a negative or bad credit history would apply to someone who has had debt but dealt with it badly by missing payments or going bankrupt.