Updated 03 December 2020
Having a history of bad credit can make it harder to get a mortgage – but certainly not impossible. That said, it may limit the range of mortgage deals you’ll be offered, and so your mortgage may be more expensive. Here’s how you can overcome a less-than-perfect credit record to climb onto the property ladder.
If you have ‘bad credit’, or a poor credit rating, it usually means that you have missed (or been late with) some payments in the past. This could be payments on utility bills, loan repayments or any other situation where you failed to pay on time or in full.
Another thing that can harm your credit record is applying for credit a lot, or being ordered to pay someone money as the result of legal action. Ironically, never applying for credit can also damage your rating (as you don’t have a proven record of repaying money). Find out more about what can harm your credit score.
Your credit history is one of the key factors that lenders use to assess whether or not they’ll give you a mortgage, and how generous that mortgage deal may be. The good news is that lenders do offer mortgages for first-time buyers and homeowners with bad credit, and the process for getting one is similar to a ‘regular’ mortgage application.
Whether you want to buy a house or remortgage, remember that there are different types of ‘bad credit’ and these are treated in different ways. So first you need to get an idea of how your particular credit situation will appear in the eyes of a lender.
A lenders will be reluctant to approve your mortgage if you have:
However, after a year or two has passed, lenders may be more willing to accept your application. You might still need a large (25 per cent or higher) deposit or (if you are remortgaging) a lot of equity. This will make you less of a lending risk. Anything else you can do to convince lenders that you are low-risk is worth trying.
Lenders may be more willing to lend if your adverse credit relates to unsecured finance. This means that although you had a debt you failed to repay, it wasn’t secured against any property or assets. Lenders are often happy to accept mortgage applications if you have late payments, defaults and CCJs for unsecured finance. Even applicants who have declared bankruptcy may find success, but again you are likely to need at least a 25 per cent deposit.
It is also possible to have a good, steady source of income, but still have a poor credit history. Lenders love reliable incomes because it means you are more likely to make every payment, but the type of bad credit you have could still affect your application. It is worth speaking to a mortgage broker who specialises in bad credit mortgages. Find out about mortgage broker fees.
Your credit score is a rating assigned to you by ratings agencies based on your financial history. Different agencies using their own unique systems and will give you different scores (so they aren’t comparable), but lenders will certainly use one or more of your credit scores to assess your application.
Generally, lower credit ratings indicate a history of poor credit, and many lenders will have a minimum threshold below which they won’t consider an application. Your mortgage broker can give you a clear picture of where you sit with different banks based on your current credit score. They will also be able to suggest specific measures you can take to improve your credit score.
Above all, remember that lenders have different thresholds, so a rejection from one doesn’t mean you won’t get accepted by another.
It is always worth checking your credit score before starting a mortgage application. The big three consumer credit rating agencies are Experian, Equifax and TransUnion. Ask your mortgage broker which of these they recommend.
There are a couple of clear strategies for improving your credit score, but no quick fixes. Most importantly, make a real effort to pay back your debts (especially secured debts). Also get rid of things like old phone contracts or shared bank accounts that could be affecting your rating. It will take time for your credit score to recover, but making these changes now will have an impact.
Second, because you know you will be seen as a risky proposition to lenders, prepare as much as possible. Try to save a large deposit, as your lender could require you to have at least 20 per cent of the property’s value. It can be a tough decision, especially for first-time buyers, but delaying your plans by six months to focus on improving your credit score can have a big impact on the interest rates you are able to get.
Another option, if you can get help from your family, is to look at a guarantor mortgage where someone else (e.g. a parent) agrees to cover any repayments you may miss.
Many mortgage brokers have a lot of experience in helping those with bad credit. They can search the whole of the market and choose the lenders most likely to offer you deals, and also suggest ways to strengthen your application.
A mortgage broker can be especially useful if your current fixed term mortgage is due to end and you are worried that your adverse credit history will make it harder to get a new deal.
It’s definitely possible to remortgage with bad credit – indeed, successfully meeting your current mortgage repayments should have boosted your credit score. If you initially got your mortgage from a specialist lender, your improved credit score may let you remortgage with a high-street bank or building society.
There are still risks, however. Sometimes the terms of a new mortgage deal may be more stringent than your current deal – even, paradoxically, if your current deal is costing you more! Some people with poor credit are told that they can’t afford monthly repayments that are less than their current repayments. These people have become known as ‘mortgage prisoners’, stuck on expensive deals and unable to switch.
If poor credit has made you a mortgage prisoner, then your mortgage broker may again be able to help. Brokers have access to every deal on the market, including deals that are not found on the high street or through comparison sites. Also, different lenders will have varying criteria. Although some may not accept any late payments over the last two years, others will be fine with one instance in the last six months. Read our guide to remortgaging to get all the information you need to make the process as smooth as possible.
You can, but it will depend on the lender. Your bad credit mortgage broker will be able to tell you which ones might accept your application.
There are, but this doesn’t mean they won’t take your financial history into account. A lender may not use your current credit score, but they will still perform a credit check.
Unfortunately, guaranteed bad credit mortgages or pre-approved bad credit mortgages are not currently offered by lenders.
It will be difficult to find a 100 per cent mortgage if you have a bad credit history. Many lenders will simply find the proposition too risky without any form of down payment. A guarantor mortgage may be your best bet.
Right to Buy mortgages are there to help people buy the council house or flat that they currently rent. It is possible to get one of these mortgages with bad credit, but individual lenders will have different criteria.
The Help to Buy scheme specifically excludes ‘credit impaired customers’ but their definition of this may not apply to you, depending on the type and severity of your bad credit. So it’s always worth asking.
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