A Guide to Bad Credit Mortgage Deals
Getting a mortgage can be hard at the best of times, let alone if you’re struggling with bad credit. However, having a negative credit report should not stop you getting a mortgage all together. There are specialist loan providers who offer “sub-prime” or “adverse” mortgages, otherwise known as bad credit mortgages. Really, a bad credit mortgage doesn’t exist – it’s like a standard mortgage just typically with a higher interest rates and a larger deposit / equity required. These types of loans are specifically designed for those looking to get a mortgage but who struggle with a poor credit rating. If you’ve missed payments, had a County Court Judgement or been declared bankrupt, this kind of mortgage could be for you.
What is a Bad Credit Mortgage?
As previously stated, a bad credit mortgage is similar to a standard mortgage. They work in the same way in that the loan still needs to be repaid in monthly sums to the lender with interest. The main difference is that bad credit mortgages tend to have a higher interest rate and desire a larger deposit / equity amount (usually around 15-30% of the value of the property). A larger down-payment will increase your chances of getting a mortgage with this kind of lender. This is because lenders will see such customers as a higher risk due to their credit history, so need a greater sense of security that the loan will be repaid.
As well as this, extra charges and fees can be higher for an adverse mortgage. These fees may be for arrangement, booking, valuation, legal, early repayment and exit fees, plus stamp duty. You may not have to pay all of these fees, but it is likely that such fees will be costlier when compared to a standard mortgage.
It is important to note that not all UK lenders will offer a bad credit mortgage. Also, some loan providers will base their decision on the severity of your credit history, how long you’ve had the problems and how closely you meet their individual eligibility and affordability. Leading mortgage providers may not offer the best rates for this kind of loan, so it is advisable to search the market of bad credit mortgages before applying. Compare the total costs of different deals, plus their fees and charges.
You could also speak to your current account holder to see what they could offer. Explain the situation and enquire about their bad credit mortgages. You may be considered, as you are already a customer and may have a higher relationship level with the loan provider.
Another option is to contact specialist brokers who can search the market for you, as well as fully explaining the differences between a standard mortgage and a bad credit one. They will also be on hand to answer any queries you may have.
What Qualifies for a Bad Credit Mortgage?
Adverse mortgages are designed for those struggling to get a loan elsewhere due to a bad credit history. If missing multiple payments, having had a County Court Judgement or been made bankrupt is stopping you from gaining a mortgage, this option is probably best for you.
Other reasons for applying for such a mortgage may be because you’re currently or have recently been in a Debt Management Plan which is affecting your credit score. If you’re already a homeowner but your financial situation has changed, re-mortgaging to a bad credit mortgage is also a cause for the creation of this scheme. The equity of your home will help to boost your loan to value, which may aid in gaining a lower interest rate on a new mortgage deal.
However, consider whether you’ll be able to find a better deal than the one you’re currently on if you’re looking to re-mortgage. If your finances have worsened, it may be that the new deals available to you are offered at a higher interest rate than your own lenders Standard Variable Rate. Also keep in mind the exit fees attached to most mortgage agreements – will you save money by having a lower interest rate on a new mortgage despite paying exit fees?
Most lenders will not offer a mortgage agreement to those who have been declared bankrupt in the past 6 years unless their credit score is now clear without defaults. Bankruptcy and repossession will look the worst to potential lenders, whereas things like a missed phone bill will be easier to be overlooked.
You’ll need to have a steady income for most lenders to consider your application. The higher your income, the better. Most lenders will also look at your employment status. For example, whether you’re self-employed, if you may make any bonuses or commissions and whether overtime is an option for you will all affect your application. Income specifics can be vital to the outcome of a mortgage deal.
Lenders may cap the size of a residential home loan at 4 or 5 times the amount of your salary. If you’re at the higher end of the earnings table, you should try to aim for the highest multiple of your wage. However, this can often be hard for those with bad credit as they are seen as higher risk customers. If you have a low income, a guarantor mortgage may be a better option. Supplementing the mortgage with benefit income may be allowed by some lenders as well. Government schemes, such as Help to Buy or Shared Ownership, could be another pathway but note these may not work in conjunction with a bad credit mortgage.
If you’re looking for a 95% loan-to-value mortgage with bad credit, then specialist advice will be essential. Specialist providers are often more flexible with low credit scores, late payments, missed mortgage payments, defaults and other the other credit problems previously discussed.
Lenders may also enquire about your age, outgoings and property type whilst considering your application. A lot of loan providers will not offer a deal to those above the age of 75, with some stretching this to 85. Outgoings such as other loan commitments and whether you have dependent children could affect your application, as well as if your property had as non-standard construction.
Ways to Improve your Chances
If you manage to get yourself a bad credit mortgage, then making these payments on time will help to boost your credit score. This means that after a few years, you may be able to re-mortgage to a standard deal with a better interest rate.
It is important that you are aware of your credit score before looking for a mortgage deal. This will save time and ensure you’re looking for the right mortgage for you. Companies such as Experian and Check My File offer free credit reports, which will then give the indication of which mortgage deals to go after. Once you’ve assessed your credit score, if time permits you may be able to build up your rating before looking for a loan. If you manage to build the report, more mortgage offers will be available to you.
There are a few simple ways to improve your credit score. Ensure that you are on the electoral roll, even if you don’t vote. This will allow providers to confirm your identity and address quickly and easily. Make sure you pay bills in full and on time and close any credit accounts that you currently do not use. If your finances permit, apply for a credit builder credit card. Use the card to buy things, then promptly pay off the debt – this will help to boost your rating. You may also want to think about some sort of sustainable borrowing, such as a guarantor loan, which will demonstrate to a loan provider that you can make repayments. Finally, checking your report regularly to ensure everything is correct can help with mortgage processes.
Whilst these things will help to boost your credit report, it might not be enough to guarantee acceptance of a mortgage right away. Building credit takes time, especially if you’ve been rejected by mortgage companies before or missed a lot of payments. Each lender is unique and will have their own criteria.
Whilst most lenders will require a high deposit amount, many frown upon their customers borrowing the money for their down-payment. This may even jeopardise the application. However, borrowing money from family members is perfectly fine for most providers. As long as you have no legal obligation to repay the money, this could be a good idea to help boost your deposit amount and hence gaining a better deal. For a residential property, the UK minimum for a deposit is 5% of the value of the house. This is raised to 25% for a property that is bought to let.
To boost your changes of gaining a bad credit mortgage, aim to save between 15% to 30% of the property value as a down-payment. Most lenders will not accept any less than this for an adverse mortgage.
It is also advisable to avoid applying for multiple mortgage deals at one time. Lenders will be able to see if you’ve applied for, and if you’ve been rejected from, other mortgages deals as this will appear on your credit report. This will give the impression that you are struggling to find a lender which could hinder your chances with other loan providers.
How Much Could You Borrow?
As with any mortgage, the amount you can borrow depends on individual situations. Lenders will assess your income, the size of your deposit and the cost of the property and combine it with the desired length of the mortgage to determine how much you could borrow.
It will also depend on the type or mortgage deal you opt for. As per a standard mortgage, bad credit mortgages still come in an array of types. Fixed rate, variable rate and discounted rates are all still available to a customer with bad credit. However, these types of mortgages will not come with better interest rates than those with good credit applying for a standard loan.
If you’re looking for a shared mortgage with a spouse or partner, then considering their credit score will play an important role in how much you can borrow. If you have good credit and theirs is poorer, then the loan will not be as good a deal than if you were to go at it alone. Although joint mortgages often allow you to borrow more, if you or your partner has a rocky credit history it is probably still the best bet to opt for a bad credit mortgage from a lender who specialises in this. This way, you’re less likely to get a rejection as well as the best possible deal for your situation.
The best way to determine how much you can borrow is to use an online mortgage calculator. Once you’ve put in your income, outgoings and property amount, the calculator will give a rough estimate of how much you could be eligible for.
Whilst it is not impossible to get a mortgage with bad credit, it is certainly made harder. Bad credit mortgages are a great way for those who are struggling with mainstream lenders to get onto the property ladder. Improving your credit will help immensely with this process, but remember that a mortgage is likely to be the biggest financial commitment of your life. There is no problem with waiting until your credit is better before settling for a deal. With this, you’ll be more likely to get a better offer. Don’t let your credit history hold you back, hard work and dedication will help you in getting the home you desire.