It can feel devastating if you have your heart set on that forever home and you aren’t able to secure the necessary finance. Sadly, that’s the position many people find themselves in as a result of having a bad credit history. If this applies to you, it will impact on a number of decisions made by your lenders – not just whether they’ll make you an offer, but how much they’re prepared to offer, and at what cost.
That being said, it’s important to remember that while it may be more difficult to get a mortgage with bad credit, it certainly isn’t impossible. Find out more below.
What are the most common causes of bad credit?
When you apply for credit, lenders will always 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, it will suggest to lenders that you can’t manage your money, which in turn means they will view you as a high-risk applicant.
Probably the most common causes of bad credit are missed or late payments. This can then escalate to a default, which is a series of missed payments. Unfortunately, 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 also count against you, especially if it is still active. The same is true if you have been declared bankrupt.
Different things carry different weight as you might expect. For instance, missed phone contract payments can have less impact than missed mortgage payments. Some may also be surprised to hear that 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 will 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. The companies you deal with, such as your mobile phone provider, credit card provider or your bank for example, share customer information with the agencies about how promptly you pay your bills are paid and if you have any debt.
In addition to this, 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 either agree or decline your offer. Some may also agree, but with conditions attached.
Any adverse credit events are removed from your record after six years. Likewise, the further in the past they took place, the less impact they will have now. Don’t forget, 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 we would recommend you check all three to be sure.
Applying for a mortgage if you have bad credit
You’ll find that the main high street lenders are generally averse to dealing with people with bad credit, and they may well charge more if they do.
Keep in mind that every time you apply for any kind of credit, it registers on your credit file. If you take a scattergun approach and apply to a number of lenders to see what they say, you could be doing additional damage to your credit score. Our advice is be careful; your best option is to contact an established and experienced mortgage broker. They will have access to contacts and deals that aren’t available to the general public. They will also be able to conduct a ‘soft’ credit check in the first instance, so your enquiry doesn’t adversely impact your credit score. This means they are likely to ensure to whole process is a great deal smoother and of course less stressful.
What will a bad credit mortgage cost?
A bad credit mortgage works just like any other mortgage – you borrow a sum of money to buy a property and repay the loan over the agreed term. It’s likely you will be faced with two issues when applying for a bad credit mortgage; you will probably be able to borrow less than someone with an exemplary credit record and the loan will probably cost you more.
Mortgage offers are based on a loan-to-value ratio. People with good credit could typically expect to enjoy a 90% LTV, which means they will 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 is 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.
Finally, 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, allowing you to get a better rate on a mortgage. Follow our simple tips below:
- Ask for 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 into administration and you lost your job – 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. This may help with future applications for credit.
- Try to avoid running up additional debt, and especially avoid payday loans. It’s also important to pay your bills on time, and to make sure you aren’t paying more than you need to for anything.
- Finally, make sure you’re registered on the electoral roll.
Remember, this is an ongoing process and you are unlikely to see results immediately, but rest assured there are options available to you.