After years of saving for a deposit, months of hunting for that dream home and countless hours spent searching for the perfect mortgage, there is still one major hurdle to get over in the quest for homeownership: a good credit history. Any would-be buyers who neglect this crucial aspect could be disappointed when they make their mortgage application.
Contrary to popular opinion, having a bad credit rating will not automatically prevent you from obtaining a mortgage. It will make getting a mortgage harder and could result in you being charged a higher interest rate than if you had a good credit history, but there are lenders out there who’ll consider you for a mortgage and a few ways you can improve your chances of being accepted before applying.
Your credit rating is based on your credit score and is a permanent record of how well you have handled credit in the past, as well as several other factors that we’ll cover later.
Basically, lenders use your credit history to determine how much of a risk you are in terms of borrowing. If you have previously had trouble making repayments on any form of credit or debt, this can result in a bad credit score. Examples of this include missing repayments on or failing to pay:
In addition, things such as being declared bankrupt, entering into an individual voluntary arrangement (IVA), having county court judgements (CCJs) or other legal rulings for debt against you, or even being placed on a debt management plan, will all also have a negative effect.
Having a ‘bad’ credit history means lenders (including mortgage lenders) will consider you as being at higher risk of defaulting (i.e. missing repayments) and so may not lend to you.
While you’ll want to decrease your borrowing as much and as fast as possible, this could be easier said than done. If you have debt from several sources, you may want to consider consolidating this in a personal loan. It will give you one single debt payment to focus on and remove the temptation of borrowing more on credit cards (provided you remember to cancel and cut these up).
Different lenders have different criteria for lending. You may be more attractive to one lender and less attractive to another. However, there are a few common things that mortgage lenders will use to assess your suitability and to check the mortgage is affordable:
Smaller sums mean less risk.
Try to have a 5% deposit as an absolute minimum. Generally, the bigger your deposit, the better.
Your salary and how long you’ve worked for an employer will be critical factors. If you are self-employed then the lender will likely want to see your accounts – most lenders will accept two years’ worth of accounts, while some may want longer and others (albeit a minority) will accept less than two years. A mortgage broker can help to identify which lenders will find your circumstances acceptable.
Having some debt is fine and expected by lenders. However, they will want to check that you are managing with the debts you already have and that any previous bad credit is resolved.
Affordability checks are universal among lenders, so they’ll want to know what your current outgoings are. This will include things like current rent/mortgage, utility bills, grocery shopping and fuel costs among others. Affordability checks are there to ensure that you don’t take on more debt than you can comfortably handle, so be open and honest in your answers.
It might be surprising, but having no credit history can sometimes mean that lenders also consider you a higher risk. This might, at first, seem unfair – after all, doesn’t this mean you have a ‘clean’ credit history? Unfortunately, it also means that the lender has no way of knowing how good you are at repaying credit. However, don’t worry, this doesn’t mean the same as having a bad credit score or history.
A good way to build your credit score is to take out a credit card, making sure you repay the full balance every month to avoid interest charges. A regular mobile phone contract is also a demonstration of being able to repay your credit.
Yes, it is certainly possible to get a mortgage even if you have a bad credit rating. Some of the more well-known lenders may still consider your application and there are even providers who specialise in credit for people with a poor credit history. These are called bad credit mortgages. To find out more about bad credit mortgages, speak with our preferred mortgage broker.
A bad credit mortgage is a mortgage is designed for people with a poor credit rating. Not only do these allow you to obtain finance for a home, but bad credit mortgages also help to repair your credit rating – but only if you keep to the regular repayments. Often, these mortgages will have higher rates of interest than if you had taken a mortgage with no prior poor credit history. Speak with our preferred mortgage broker.
If you do have a history of bad credit, it is reasonable to question if a mortgage is the right thing for you. Obtaining a mortgage is a significant financial decision (and a home is often the most expensive thing you will ever buy) so think carefully before you decide to go down this route. If you have struggled with managing debt in the past, you’ll need to be confident in managing your finances now. As with everyone considering a mortgage, you must be completely sure that you can afford the monthly repayments.
If you're hoping to climb onto the property ladder and your credit score isn’t great, you’ll need to take action. While getting a better credit history is by no means an easy feat, here are some steps you can start with to make sure that your record is as good as it can be:
An alternative to bad credit mortgages is guarantor mortgages. These are mortgages where your repayments are ‘guaranteed’ by someone of sound financial standing. This person is legally liable for making repayments if you fail to keep up with the mortgage payments.
Our mortgage calculator helps you to see how much your mortgage might cost you each month.
Our how much can I borrow calculator gives you a range of how much a lender might consider lending you under a mortgage. This calculation is only an indication only.
Read our How much can I borrow for a mortgage guide to find out more about what can impact your potential sum of borrowing.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.