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How to get a mortgage if you have 'bad' credit

Andre Spiteri
15 May 2017

Can you get a mortgage if you have a ‘bad’ credit history? And how do you go about it? Here’s our guide to ‘bad’ credit mortgages.

Getting a mortgage with bad credit is tricky, but not impossible.

In the past, there were a number of lenders who used to specialise in offering 'bad' credit mortgages, also called 'subprime' or 'adverse credit' mortgages. These types of lenders were largely blamed for the 2008 financial crisis, so many of them disappeared.

Whilst lenders these days tend to be much more rigorous with their mortgage application processes, it's still possible to get approved for a mortgage even if you have 'bad' credit.

Here we're going to explore what might be regarded by lenders as 'bad' credit and look at all the available options for taking out a mortgage if you’re in this situation.

What is ‘bad’ credit?

If you’re looking for a ‘bad’ credit mortgage it probably means you have had problems with borrowing money in the past, and that your credit score is low. This may make it harder for you to take out credit now, or at least take out credit on an affordable interest rate. Some of the things that could negatively affect your credit score include having accounts in arrears, being declared bankrupt or being on a debt management plan.

However, whether or not you have ‘bad’ credit is somewhat subjective. This is because expectations vary between lenders - so one may approve you while another rejects you regardless of any ‘bad’ credit you may have.

What if I’ve never borrowed before?

Having little or no credit history may also be problematic if you want to take out credit. Without a credit history, you’re an unknown entity. In other words, lenders can’t know if granting you a mortgage is risky or not.

For this reason, you may find yourself in a similar situation to someone with a bad credit history when applying for a mortgage. You’re unlikely to qualify for the best deals; and you may have to settle for a mortgage aimed at people with ‘bad credit’ instead.

How to build up your credit score
If you have ‘bad’ credit or you don’t have any credit history, it’s never too late to start to building up your credit report and improving your score.

One thing you may want to consider is getting a credit builder credit card - a credit card designed for those who wouldn’t qualify for a standard credit card because of a lower credit score. By using the card responsibly (paying any amount you’ve borrowed on time and in full), you’ll start to build up a record of good borrowing behaviour. This will be logged on your credit report and could help to improve your score.

You can also try out one of our Coaching programmes to repair or build your score (this 5 minute programme even comes with a ‘to do’ list). You can also read our 10 steps to improve your credit score.

How do bad credit mortgages work?

Bad credit mortgages work like any other mortgage, except that they accept people who had problems paying their debts in the past. For this reason, the terms of the mortgage will probably be less favourable than they’d be for someone with a better credit score.

First and foremost, your interest rate will probably be at the higher end of the spectrum. This is to offset the higher risk you pose to lenders.

You’ll probably also be asked to put up a higher deposit than with a conventional mortgage. While it’s possible to take out a mortgage with as little as a 5% deposit if you have good credit, subprime lenders require 15% and upwards.

You may be able to apply for one of the government’s help to buy schemes in order to put your deposit together. These schemes make getting a mortgage easier by allowing you to borrow up to 20% of the purchase price interest-free for five years.

However, you won’t qualify for a help to buy scheme if you’ve been declared bankrupt in the past six years.

How do I apply for a bad credit mortgage?

If you have bad credit, try to avoid making multiple mortgage applications.

Most mortgage providers cater to people with a good score, which means there’s a risk you’ll be rejected. Having multiple applications for credit rejected in a short span of time will probably further damage your credit score and could make matters worse.

Instead, start by explaining your situation to your bank; and ask them whether they have products that might be suitable for you. That way, you’ll find out what your chances of being approved are without leaving a mark on your credit file.

Many bad credit mortgages are only available via mortgage brokers, so seeing one should also be a priority. Besides, an experienced broker will know which lenders are likelier to accept someone with your particular circumstances, which boosts your chances of getting approved.

For best results, choose a mortgage broker who advises on the whole market. To find yourself a broker you can try using websites such as Cherryfind, Unbiased or VouchedFor, who all come recommended from the Money Advice Service.

Guarantor mortgages
One possible option if you have bad credit is to think about a guarantor mortgage. Here, a family member or friend co-signs the mortgage as guarantor. In other words, they bind themselves to repay the mortgage if you default.

You’ll still need to be credit checked if you take out a guarantor mortgage, as will your guarantor. Your guarantor will also have to provide collateral, usually their home.

Finally, your lender will want to carry out an affordability assessment before approving your mortgage. This is your chance to show you’ve learned from your mistakes and can manage your finances responsibly. Prepare ahead of time by eliminating unnecessary or frivolous expenses. You could also make a budget and stick to it, as this will prove you’re able to live within your means.

In a nutshell:
  • You’re considered a bad credit risk if you have a thin credit file, a history of defaulting on your debts or you’ve been adjudged bankrupt.

  • Some lenders will accept you even if you have bad credit, but the terms of your mortgage will be much less favorable than those you’d get if you had a good score.

  • Avoid making multiple mortgage applications, you’ll potentially damage your score further. Instead, talk informally to a bank advisor or enlist the services of a mortgage broker.

  • Show your lender you can be trusted by staying on top of your spending and rebuild your credit score by never missing a repayment.

by Andre Spiteri

Andre is a former lawyer turned financial writer. Andre has written this article especially for ClearScore.

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