People from all walks of life find it difficult getting on the property ladder. Mortgage approvals are low in 2019 compared to the dizzy heights of the 90s and 00s. For various reasons, approvals are still dropping now even though we are deep into this decade. One of the reasons is the increase in number of people with bad credit history. Missed credit card and store card payments, unpaid loans and other ways in which people fail to pay debt can and will have a negative impact.
If you have a bad credit score, you will find it difficult to get a mortgage approval, either to buy a home or for necessary home upgrades. It’s even harder when that poor credit history has CCJs, defaults, IVAs or even bankruptcy on your record.
Is it even possible to get a mortgage with bad credit?
The short answer to that question is “yes”. However, it is much more complex than that. There are many ways you can go about applying for a mortgage, even with bad credit. Most routes to home ownership or upgrade will be closed to you, however. You will need to consider your options such as instant guarantor loans among others to achieve that dream of home extension or ownership. Most lenders perceived little to no difference between an applicant with a poor credit rating due to financial difficulty and one with no credit history.
Every time you apply for a major loan such as a mortgage, lenders check your credit rating. With mortgages, some things that negatively impact your score become more important. There are some caveats; it all depends on the amount you wish to borrow now and how long ago the negative impact event took place. Some high street banks will outright refuse. You may experience greater flexibility with building societies but most will likely still reject your application. Your best option is to seek lenders who offer mortgages designed for people with a low credit score.
What you need to know about bad credit mortgages
The good news is that consumer association Which? analysed the mortgage market in early 2019. They discovered that there are around 5,000 mortgage deals and about one third open to customers with bad credit. Many more are closed to you, but there is cause for relief. You just need to ensure you specifically aim for mortgages for people with bad credit. You may, in most cases, require a minimum 25% deposit. Such lenders offer around 70% or 75% LTV (loan to value ratio).
The interest rates may be higher than average initially, but you will be offered a mortgage if the lender assesses that it is within your budget. The main advantage to bad credit mortgages is flexibility in assessing your application.
Applying for a bad credit mortgage
The first thing to note is top stop applying for mortgages until you have your credit score. Use one of the many choices of credit agency for your score and receive a free full report. Once you have that information, you will be better placed to understand why you were refused a mortgage. Mortgage providers will only consider applications from people with a good credit score.
Further rejections are likely if you have a bad credit rating. What’s more, the closer these rejected applications are together, your credit score will continue to drop. This is when you should look at your bad credit mortgage options.
Subprime mortgage is another name for standard bad credit mortgages. Most of the details about this type of mortgage have already been presented.
- A 25% deposit minimum with a 75% loan to value ratio. This could be cost prohibitive depending on the location
- The successful application is tied into the deal for at least 2 years, typically 3 years, and may not renegotiate before that time
- A slightly higher than average interest rate for the length of the minimum 2-3 year mortgage
Being on this type of deal will allow you to build and repair your credit rating for the future. This will make applying for any type of credit much easier.
Instant guarantor mortgages
The second option is a guarantor mortgage. These are great for people who may not have the 25% deposit for quite some time. They are also useful for first time buyers with little to no credit history and people on low incomes who could afford the mortgage repayments. Instead of relying on your credit history (which may be absent or poor due to past illness or loss of a job), it requires a person to agree to act as guarantor on your behalf.
A guarantor is a reliable and financially stable person who agrees to guarantee the payments if you default.
- There is less risk for the lender because they are assessing the guarantor, not the borrower
- The guarantor understands they are eligible to cover the cost of the debt in the result of any default
- Guarantor mortgages are a popular method of helping people get onto the housing ladder. Typically, this will be a parent or other financially stable family member