When it comes to getting a mortgage, your credit history is a pretty important factor. It plays a big part in how a lender will assess your affordability. Looking into your credit history is one of the ways in which a lender will gain information on how reliable you have been at paying back debts and loans in the past. After all, a mortgage is likely to be the biggest loan you’ll ever have! A lender needs to be confident that you’ll be able to keep up with your repayments across the whole lifetime of the loan.
So, how does bad credit affect a mortgage application? Is it still possible to get a mortgage with a bad credit history? In this article, we explain all you need to know.
What is credit?
Firstly, let’s talk about credit. Credit is the ability to borrow money or access goods or services on the basis that you’ll pay later or over an agreed period of time. Once an individual opens any sort of credit account, they will be given a credit score by the major credit reference agencies. Whilst the actual score might vary slightly between the different credit agencies, it is essentially a reflection of how you’ve managed the repayment of your current and any previous debts and bills.
If you have ‘good credit’, then you are considered creditworthy. It is a signal that a creditor can trust you. If you have borrowed money in the past and always kept up with repayments, it’s likely that you will have a good credit score.
If you have ‘bad credit’, it may be that you have a history of missing or making late payments. This will be flagged up as a warning to other potential lenders via your credit rating or credit score. Applying for credit too often can sometimes also have a negative impact on your credit rating.
Having no credit history can also be a challenge. This does not necessarily mean you will have a bad credit rating. However, if lenders have nothing to go on, they can’t be sure of whether you are a responsible borrower or not. For this reason, you may miss out on some of the more preferable deals available. It’s a good idea, therefore, to build up some level of good credit history before applying for a mortgage if you can.
Can I get a mortgage with bad credit?
So, you have bad credit. Where does this leave you when trying to get a mortgage? Well, it doesn’t mean that it is impossible to get a mortgage – that’s for sure. Yes, it can be more of a challenge. However, there are specialist lenders out there who are willing to lend to those with a less-than-perfect credit score.
Some lenders will offer mortgages that are designed for those with poor credit. These are often referred to as bad credit mortgages, adverse credit mortgages or sub-prime mortgages. Although lenders offering these mortgages may be willing to lend to you, they will still regard you as a higher risk. As a result, you often have to pay a slightly higher interest rate on your borrowing than you would if you had a good credit rating. Some lenders may even require you to put down a larger deposit of say 20-25% of the value of the property, rather than the more usual 5-10%. This is a way to limit their risk.
What about if your partner has bad credit?
When you apply for a joint mortgage with a partner, both your credit histories are taken into account. If one of you has bad credit, it can have a negative impact on your joint application. How the application will be viewed will differ from lender to lender. Some may decline your application altogether. Some may still offer you a mortgage, but at higher interest rates or with some other restriction or conditions.
In such circumstances, enlisting the help of a mortgage advisor and broker can help your chances of getting the offer you need. They will know which lenders to turn to in order to give your application the best chance of success.
You may be wondering whether it is better to apply for a mortgage in just the sole name of the partner with a better credit history. This could work, but it’s important to consider income levels and the level of borrowing that it will support. In most cases, two salaries on a mortgage application will be better than one. This will also allow you to borrow more money. Of course, you will need to find a lender who will take a view of the credit history and be willing to offer a mortgage to you.
If you have good credit and are the higher earner, it could make sense to be the sole applicant. If, however, it is the higher earner who has poor credit, then it’s not so straightforward to eliminate them from the application. This could really restrict the amount you will be able to borrow.
In these circumstances, a joint application may still be the best way to go. However, you should seek advice from a mortgage broker and advisor, such as us here at Mortgage Light. We will be able to direct your application to one of the more sympathetic lenders willing to consider potentially higher risk applications.
Is it easier to get a mortgage with a guarantor?
If you have bad credit, it may be easier to get a mortgage with a mortgage guarantor. Having a mortgage guarantor to support your application can take away some of the risk. It may also help you access deals that may have otherwise been denied to you.
A mortgage guarantor will generally be a parent or close family member. They act as a guarantor for your repayments, should you not be able to maintain them. The guarantor will need to meet the eligibility criteria of the mortgage lender, have sufficient disposable income available to cover your mortgage commitment if needed, and/or have cash savings or equity in property available to offer as security in case of your default.
Using a guarantor may provide the lender with enough confidence to lend to you, despite your credit history. If you are unable to maintain the mortgage repayments, then they can call upon your guarantor to make these for you.
It’s important to note that lenders will insist that a mortgage guarantor receives independent legal advice before going ahead with the application. This is to make sure that they are fully aware of the liability that they’ll be taking on and the consequences for them should you fail to meet your repayments.
Find out more – ‘What is a mortgage guarantor?’
How can I improve my credit score?
The good news is that credit scores can be improved. Arguably, the greatest remedy is time. A credit score won’t dramatically improve overnight. However, there are plenty of steps you can take to ensure that it only gets better. Plus, the longer ago any blemishes occurred, the less impact they are likely to have on your credit score.
Of course, the first thing is to ensure that you keep on top of all your current financial commitments. Make sure that all repayments on any loans, credit cards and utility bills are made on time and in full.
If you have access to several credit cards and they have been paid off, it is beneficial to close down the accounts if they aren’t in use. Some lenders don’t like it when a person is able to obtain a lot of finance. Secondly, you should ensure that you are on the electoral roll and that all your personal details are correct. This feeds into your credit score.
Lenders use the information from the electoral roll to confirm details such as your name, address and residential history and that they match with what you have out on your mortgage application. If the information recorded does not match or you cannot be found on the electoral roll, then some lenders may choose to simply decline your application.
Thirdly, you should review the data on your credit file to ensure it is accurate. If you identify any errors, then make sure you contact the relevant lender involved. Ask them to get it amended as soon as possible. Keep a regular check on your file to pick up any errors early so you can get them corrected quickly. If there is a reason why you may have had some financial difficulties in the past, such as redundancy or ill health, you can explore the option of adding a note of correction to your credit report. Some lenders may take this into consideration and it could encourage them to be more flexible.
It’s also important to note that every time you apply for any form of credit, it will be reflected on your credit file as a ‘credit search’. This remains even if your application didn’t go ahead. If you are making a lot of applications, lenders may assume that you are reliant on credit. If you are planning on applying for a mortgage, it may be worth being selective about other applications that you make in the six months prior.
Whatever your circumstances, getting professional advice before submitting a mortgage application is always a good idea. This becomes much more important if your credit rating is poor for any reason.
Here at Mortgage Light, we know the lenders who will be sympathetic to applicants with less-than-perfect credit scores. We know how to position your application to stand the best chance of getting approved first time. So, if you have any concerns about applying for a mortgage with bad credit, give us a call on 01908 597655 or contact us via our website and one of our advisors will be in touch.