Purchasing property can sometimes be a difficult ride, even for those with a seemingly strong financial record. It can be especially difficult for those burdened with a poor credit history for whatever reason. Don’t let a bad credit history put you off trying to buy a property, however. Mortgages of all kinds can still be sourced, provided you adopt the right approach.
Bad credit is far from uncommon. People in the UK owed £1,742.1 billion at the end of June 2021. Inevitably, some percentage of this will have fallen into arrears, or be in default to some degree.
To help people who find themselves in tight financial situations get onto the property ladder, the government introduced the shared ownership scheme back in the 1980s, and it remains a popular affordable purchasing option to this day. There are some basic criteria to qualify for participation in the scheme, none of which relates to your financial status. You will, however, need to obtain a mortgage from one of the participating lenders and this is where your credit record will come under scrutiny.
How does the shared ownership scheme work?
Firstly, let’s explain how the shared ownership scheme works. The scheme is a cross between buying and renting. You purchase a share of a property (minimum of 25%) and pay rent on the remaining portion. This remaining portion is owned by a Housing Association and you pay rent to them on this percentage, normally at a reduced market rate.
To purchase a shared ownership property, you will need to provide a cash deposit to go towards the purchase of your chosen share of a property. You will then need to raise a mortgage from a suitable lender to help pay for the remainder of your share of the property. A Housing Association will own the rest of the property and charge you rent to occupy it.
Over time, you can increase your stake in the property, often up to 100%. The more of the property you own, the less you will need to pay in rent. This process is called ‘staircasing’.
Shared ownership and bad credit
As with any kind of mortgage, getting a shared ownership mortgage with bad credit can be a challenge. A lender’s number one concern is whether you will be able to meet your repayments. Bad credit history will cause most lenders to look closely at your finances and consider carefully whether you might be too much of a risk.
Negative items in your credit history will raise red flags, particularly with most high street lenders. High street lenders are generally very cautious with their lending. These red flags could be late payments for utilities or missed credit card or loan repayments. It could also include defaults such as County Court Judgements (CCJs) or previous bankruptcy.
There are, however, a number of specialist lenders out there willing to cater to the needs of those with bad or poor credit records, so you should not feel excluded from the mortgage market and therefore property ownership.
It’s important to note that this should not discourage anyone with adverse credit to apply for a shared ownership mortgage. In today’s landscape, there are plenty of specialist lenders out there willing to cater to the needs of those with bad credit.
It is a good idea to enlist the help of a mortgage broker and advisor that specialises in shared ownership mortgages and/or bad credit mortgages, such as us here at Mortgage Light, to help give you the best chance of being accepted.
Will I get rejected for a shared ownership mortgage with bad credit?
Every mortgage application is judged on a case-by-case basis. Most lenders will look at how long ago any negative items on your credit history took place. They will consider how severe it was and what the final outcome was before making their final lending decision.
It can be useful to provide background to any instances of financial stress you may have experienced along with your application. This could be credit problems caused during a period of redundancy or perhaps a difficult relationship break up and an uncooperative ex-partner. You may need to provide some evidence in support of your claims if available.
If a lender is willing to lend to you for a shared ownership mortgage but has their reservations due to your past credit history, then they may require you to put down a larger cash deposit (perhaps 15% or 20% to mitigate risk for them, rather than the more usual 5-10%). Higher rates of interest on your mortgage borrowing may happen if you are unsuccessful with the high street bank and a broker needs to source an adverse lender. This is to reflect the higher risk you represent and to compensate them for taking this risk.
Will I still qualify for the shared ownership scheme with bad credit?
When you apply for the shared ownership scheme, you will be assessed on your personal circumstances, rather than your creditworthiness. To qualify for the scheme, you must:
- Be at least 18 years old and a UK resident
- Earn less than £80,000 a year as a household (£90,000 in London)
- Not currently own a home
If you meet these criteria, then you will be eligible for acceptance under the scheme. Of course, you will then need to obtain a shared ownership mortgage to support you with the purchase of a share of a property. This is where you may run into difficulties if you have bad credit.
Lenders will conduct a credit search on you as part of their initial assessment of your application. Any adverse information recorded will go against you. It may even cause your application to be rejected there and then.
Find out more ‘Who is eligible for shared ownership?’
How can I improve my credit?
There are some things that you can do to improve your credit score. This should increase your chances of getting borrowing approved now and in the future. Firstly, make sure that the information recorded on your credit file is correct. Errors can and do occur. If you do spot something that isn’t correct, then you should contact the relevant company who recorded it and ask them to have it corrected.
Make sure this has been done and check your credit file to confirm it reflects the true record. Identity theft is a growing problem and fraudsters may use your personal details to obtain goods and services in your name on credit, without any intention of paying for them. The resultant bad credit will then sit on your record, causing you problems in getting finance. Early action to identify and resolve any such instances will help prevent you suffering the consequences of such frauds.
You should also make sure that you are correctly recorded on the electoral roll. Lenders will use information from the electoral roll to confirm things like your name, address and residential history. They need to check that the information you have provided in your application is correct and matches official records.
With many lenders, failure to find your details on the electoral register will hurt your credit score. Some might choose to simply reject your application. As a minimum, it will cause delays whilst they try to find an alternative way to verify the information you have provided.
It should go without saying, but make sure you pay your bills on time. Adhere to the conditions you’ve agreed with all your suppliers and credit providers. You should also arrange to close any credit accounts that you no longer use. Keep an eye on your credit report regularly to make sure that all the information on there is correct. You can access your credit report for free using Clear Score.
For most cases, however, time is the best remedy for a bad credit score. So long as you keep on top of everything and nothing new is added, your credit score will improve and recover with the passage of time. Focus on your money management. You should be rewarded with an improved credit rating and access to a greater range of borrowing options.
Mortgage Light can help you
If you have bad credit and are worried about being accepted for a mortgage, shared ownership or otherwise, please speak to us at Mortgage Light. We have plenty of experience helping people just like you not only secure a suitable mortgage with bad credit but also to understand and improve their credit score over time.
Let us put in the time and energy to help you. Pick up the phone and contact us, or come in and meet us for a free consultation and we can talk through the options available to you.