Getting a mortgage with bad credit history?

The way lenders view a mortgage applicant’s finances and their ability to pay a mortgage has changed over the past few years.

They must ensure applicants can afford to pay their mortgage even if interest rates rise, so they stress test applicants against a much higher interest rate.

Affordability and having a good credit record are key to securing better interest rates. Lenders want applicants to show they can manage their finances. But what do you do if you haven’t got a squeaky-clean credit history? Maybe you haven’t been paying your bills, you’ve had a County Court Judgement (CCJ) against you or have been declared bankrupt.

A blemished credit history is likely to lead to your mortgage application being declined by the majority of high street and mainstream lenders, because you don’t fit their strict lending criteria.

If you are declined, it is best to seek advice from an independent mortgage adviser about your next steps, as applying to several other lenders and being declined again in a short space of time, will also have an adverse effect on your credit file.

There is some good news though. Over the past couple of years there been an increase in the range of adverse credit providers, such as Bluestone, Buckinghamshire Building Society, Kent Reliance, Precise and Vida Homeloans. They are specialist providers of home loans known as adverse credit or subprime mortgages.

This type of mortgage typically has a much higher interest rate than conventional mortgages, often three or four times more, sometimes up to a rate of 8%. Whilst this may not seem fair or appropriate for people who have a history of bad credit, the lender is taking a greater risk with its money and requires to charge more against the risk.

It is also worth noting that lenders will require you to provide a much larger deposit than conventional mortgage borrowers, typically around 30% but some require only 15%.

Specialist lender Precise currently has a range of mortgage products available for those with a less than perfect credit history.

Within their specialist prime range, they are offering for 75% loan-to-value, a two-year fixed mortgage at 2.59%. For 85% loan-to-value they are offering a two-year fixed mortgage at 3.19%. Both have a product fee of £995. The applicant should have no defaults in the past 24 months, no CCJ in the past 72 months, a missed mortgage or secure loan payment in the past 12 months (1 in 36 months), and 1 missed payment for an unsecured arrear in the past 12 months (2 in 36 months).

For their near prime tier 5 products at 80%, they are offering a two-year fixed mortgage at 5.59%. It comes with a product fee of £1,495. Acceptable adverse criteria include: up to 5 defaults in the past 24 months, 3 CCJs in 24 months, 1 missed mortgage or secured loan arrears in the past 12 months (up to 3 in 36 months). Debt management plans are allowed if satisfied over 36 months ago.

Although there is a growing range of mortgage lenders and products on the market for those with a poor credit rating, we would always recommend that you seek advice from a mortgage broker before doing anything.  They can review your credit score, find out what your options are and work out the best plan forward for your individual circumstances.

If you know you can’t get a conventional mortgage because of your history, we would always recommend taking the time to get your finances in order. This is so you are best placed to get a conventional mortgage at a later date or at least a better rate on an adverse credit mortgage product.

Give yourself more time to save for a larger deposit and improve your credit history by showing that what happened in the past was a blip on your record and not a representation of how you manage your finances now.

For example, get a credit card with a £200 limit and use it for your petrol, making sure a direct debit is set up to repay it each month. That way you can show lenders that you can organise your finances and repay and manage credit. However, you should avoid multiple applications for credit facilities as this would adversely impact your credit score.

By taking steps like this to repair any past damage you are likely to get a better interest rate on your mortgage.

When looking at your mortgage options, the option to fix your mortgage interest rate may be worth considering, especially if you have a history of missed payments, because the rate you are paying now will stay the same for whatever the fixed rate term is, i.e. 2, 3 or 5 years. This will ensure that there is certainty for that period of time after which the option to review is available.

Bank statements are also extremely important when applying for a mortgage.  You will need to present three months bank statements as evidence of your outgoings and again, how you manage your finances. You should make sure that you are not going over your authorised overdraft limit and ideally not in your overdraft at all. Make sure you have no bounced direct debits or late charges.

You should also ensure you are on the electoral role.

We work with customers almost a year in advance of them purchasing a property and getting a mortgage. This is so we can understand their financial and personal circumstances completely. Not just looking at their circumstances now but what the future might look like – a couple looking to start a family or an elderly couple looking to retire and downsize. Every situation is different.

As always, we recommend that people seek advice from a professional mortgage broker, who can look at a range of products available to each individual customer and match these to meet their requirements.

Here are my five top tips for getting a mortgage

1. Show you can manage credit and don’t miss any arranged payments / direct debits. Any missed payments or mistakes should be rectified as soon as possible
2. Close any unused credit card accounts
3. If you can raise a bigger deposit your loan amount will be reduced and you’ll have a better loan to value. The better your loan to value, the less stringent lenders’ risk profiling tends to be.
4. Be realistic about what you can afford and consider the additional services and fees you will need to pay. For example, stamp duty, conveyancing and arrangement fees.
5. Be flexible about the type of home you want and its location. Explore all the possibilities but think about your expenses, such as travel to work.

Article by Michelle Niziol, CEO, IMS Property Group