How to get a mortgage with bad credit
The recent economic downturn has trapped many people in difficult financial situations.
If you’re one of these people and you are looking for a way onto the property ladder, having a bad credit history can really feel like a kick in the teeth when it comes to applying for a mortgage.
We asked three mortgage experts what advice they would give to people with poor credit looking to buy a property:
David Hollingworth of London & Country Mortgages says: “The tighter mortgage market that followed the credit crunch saw the options for those with a less than perfect credit history clam up.
The high street lenders remain interested in those that have a good record and credit score but of course there are all sorts of reasons that can lead to blemishes on a credit file. It might be the loss of employment or a breakdown in a relationship that has led to the initial problem for example.
“If borrowers do have worries about what might be showing on their credit file it is easy to check your file online for little or no cost and if there is any incorrect entries then it can be taken up with the firm to get the entry removed.
“That’s not to say that it is impossible to secure a mortgage from mainstream lenders but in order to improve your chances it is important to rectify any issue at the earliest opportunity and then establish a good track record. If a high street lender is to lend then it will want to see that the borrower has recovered from the initial problem and subsequently remained problem free and in control of credit commitments.”
|Top ways to improve your credit rating:
• Rebuild credit by using and regularly clearing a credit card.
Martin Wade of Your Mortgage Decisions says that the worse the credit the larger the deposit required.
In extreme cases this could be as high as 40% but usually 15% would be a good target: “Obviously the higher the deposit the better the terms of the deal. Sadly every lender differs and therefore there is no one size fits all answer. This of course is where an adviser earns his living.
“These days anyone with as much as a couple of missed credit card payments will struggle to secure affordable borrowing and as a first time buyer with adverse your options are practically non-existent. Much more adverse credit than this and you are in for a long wait of a year or more while you rebuild a good track record and demonstrate reliability.”
Occasionally, there is an option to get on the property ladder with the help of a guarantor, who will take on the role of either first name on the mortgage as a co-signatory or as a back stop should the first applicant fall behind with payments.
Note that this is not easily undone and unless the applicant’s financial situation improves the guarantor could be blocked in for many years as the lender will not release them.
Wade says: “Clearly a generous offer by a relative can be considered but it has serious implications for both as this will also then effect the guarantor’s ability to borrow in the future as well as possibly their credit record should a payment be missed as they too are named on the mortgage.”
Similarly, it is possible to ‘club together’ in a group to get on the property ladder, but buying in a group demands serious thought.
You should have a legal agreement drawn up by a professional before you buy that specifies each person’s deposit contribution, monthly repayment and what should happen if any member wants to sell, leaves or dies.
Adviser Jane King of Ash Ridge Asset Management says that in very few instances where a mortgage seeker has fallen into bad credit due to no fault of their own, there may be an instance where an adviser can talk to the lender to see if it will be more flexible with the application.
King says: “If this is the case then it should help present a robust case to a lender and I would feel justified in asking them to take a flexible view on an application.
“I usually speak with an underwriter before submitting an application and explain the scenario and if it the adverse was just a short term thing that had been settle fairly quickly and was for small amounts then I would ask them to take a view and show some flexibility on their decision when deciding whether or not to lend. This will often work for a sympathetic lender and the borrower could obtain a better rate than they may otherwise have been offered.
“It does not work with all lenders all the time but it is very gratifying when it does. These lenders are mainly smaller building societies or “off High Street” lenders.”
Debt-laden mortgage seekers also need to consider how they expect to pay back the mortgage alongside their existing debt repayments. This is a key point as unless steps are taken to improve their current credit rating, it is unlikely that they will have access to a better interest rate, as interest rates on credit impaired loans can be extremely high.
King adds: “If they were re-mortgaging in order to repay some or all of their debt I would warn them that by turning any unsecured debts into a mortgage secured on their home they were risking repossession if they failed to keep up repayments.”
This would not be the case if the debt was to remain unsecured.
“If the credit history was so bad that it would appear that bankruptcy may be forced upon them I would not recommend they take out a mortgage at all and would expect even a credit impaired lender to decline such an application.”
For those that have yet to build up sufficient track record then it may require a more specialist lender. There are some that will accept slight blips in credit history although will still expect to see evidence of some recovery. These types of mortgages are called ‘adverse credit’ mortgages.
However, the rates on these deals will be higher as a result of the higher risk profile but could give access to mortgage finance sooner than would otherwise be possible and enable the track record to improve before hopefully returning to the mainstream lending market. Mortgage seekers considering these loans should sit down with an adviser to work out if that is a financially viable option in the long run.
One example of an ‘adverse credit’ mortgage is the latest in the market by lender Magellan, which requires at least a 25% deposit and the rates available are currently 8.55%. Other lender options include GE Money, Precise Mortgages and Platform.